Santos (ASX:STO) share price lifts despite ratings concerns

More heavyweights are weighing in on the planned merger debate.
The post Santos (ASX:STO) share price lifts despite ratings concerns appeared first on The Motley Fool Australia. –

The Santos Ltd (ASX: STO) share price has crept into the green in early trade, despite concerns from ratings agencies on its planned merger with Oil Search Ltd (ASX: OSH.

Santos shares are now exchanging hands at $6.41, a 1.58% step into the money from the open.

What did the ratings agencies say?

Credit ratings agencies Standard & Poors (S&P) and Fitch have weighed in on the transaction, citing various risks to Santos’ credit profile.

Specifically, both refer to the risks associated with doing business in Papua New Guinea (PNG), claiming geopolitical tensions remain a concern to the economic stability of the nation.

To illustrate, S&P was quoted as saying “in our opinion, the increased earnings concentration from PNG could put downward ratings pressure on Santos”, in yesterday’s Australian Financial Review.

Moreover, both Fitch and S&P note that around 40% of the “combined company’s production will be from Papua New Guinea” through PNG LNG.

Fitch explicitly noted that “Santos will face greater country-risk exposure because Papua New Guinea’s sovereign credit profile is weaker than that of Australia”.

It also anticipates that cash generated at PNG LNG will be “used to fund operating costs and debt repayments”.

S&P noted several systemic risks that pose a threat to the merged entity’s business operations in PNG.

In addition, the merged company will have a “number of expansion projects” on its books that are “likely to pressure free cash flow” if they go ahead.

Given these risks, among others, Santos’ BBB investment-grade credit rating on its corporate debt may be in jeopardy, according to the ratings agencies.

It’s not all painted with risk

Contrasting the view both agencies hold on PNG’s geopolitical stability, each agency also believes the transaction will bring its benefits.

Fitch believes the impact is “credit neutral” for Santos’ rating and that the merger will bring “greater scale”.

Moreover, it believes the merger will “result in synergies” that would “support cash flows while investments are made”.

S&P also highlighted Santos’ history in active portfolio management and its track record of successfully integrating acquisitions in the past.

“The merged entity’s enlarged scale and free cash flow generation should support its upcoming funding plans,” S&P was quoted saying in yesterday’s AFR.

Santos share price snapshot

The Santos share price has had a choppy year to date, posting a return of just 2% since January 1. Santos shares faced headwinds over the past year as well, climbing by 9.7%.

Both of these results have lagged the S&P/ASX 200 Index (ASX: XJO)’s gain of around 25% over the last 12 months.

The post Santos (ASX:STO) share price lifts despite ratings concerns appeared first on The Motley Fool Australia.

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The author Zach Bristow has no positions in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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