New Moody’s rating for Santos due to growth from Oil Search merger

Moody’s Investors Service (Moody’s) has assigned an investment grade credit rating with a stable outlook to the Australian energy giant Santos following the firm’s merger with Oil Search.

This adds to Santos’ existing BBB rating with a stable outlook from Fitch Ratings and BBB- with stable outlook from S&P Global Ratings. Santos reported on Wednesday that Moody’s had noted the significant production and reserves added by the merger with Oil Search, positioning Santos’ scale metrics favourably relative to Moody’s investment grade rated peer group.

To remind, Santos agreed to a merger with Oil Search, which became effective on 10 December, following the approval of Oil Search’s scheme of arrangement by the National Court of Papua New Guinea. It was agreed that the combined Santos and Oil Search would be led by Santos Managing Director and Chief Executive Officer, Kevin Gallagher. The firm also named a former senior executive of Woodside as its new chief financial officer a few days ago.

Matthew Moore, a Moody’s Senior Vice President, remarked: “Santos’ investment grade credit profile is supported by the improved size and scale of its exploration and production operations with a diversified geographic presence across key Australian hydrocarbon basins and an increased exposure to low-cost LNG production upon completion of the merger with Oil Search Limited.”

Santos’ CEO, Gallagher, said the merger with Oil Search had created a company with strong and diversified cash flows to fund growth, delivering shareholder returns and navigating the transition to a lower-carbon future.

According to Moody’s, the assigned Baa3 rating reflects Santos’ position as a top independent exploration and production (E&P) company in Australia, with a strong share in the Australian domestic gas market and a growing LNG business.

Moody’s sees Santos as more advanced in some of its carbon transition strategies than many of the peers of similar scale, since Santos started addressing its exposure to carbon transition risk with its tangible pipeline of carbon reduction projects, including the Moomba Carbon Capture and Storage (CCS) project sanctioned in November 2021.

“Santos’ rating also reflects higher exposure to country risk following a completion of the merger, which will see the contribution to production and earnings from Papua New Guinea increase materially given the company’s increased share in the PNG LNG operation,” added Moore.

Moody’s expects Santos’ 2021 production levels to be around 115-120 million barrels of oil equivalent (boe) and proved and probable reserves of around 1.3-1.4 billion boe. The rating agency explains that Santos’ currently committed growth spending over the next few years will largely be centred around its Barossa project, which will develop reserves to process through its existing Darwin LNG plant (DLNG) and extend the life of this facility.

Moreover, it is worth noting that the assigned stable outlook reflects Moody’s current outlook for oil and gas prices and Santos’ operating profile, which drives the rating agency’s expectation that the company will be able to register appropriate credit metrics for the rating over the next several years.

Additionally, Moody’s considers Santos’ ongoing liquidity as excellent, benefiting from around $2.6 billion of cash and around $2.6 billion of availability under committed credit facilities. Based on Moody’s assessment, when this is combined with an operating cash flow of around $2.5 billion, it will be more than adequate to cover cash uses, which include around $2.2 billion of capital expenditures, $200 million of dividends and around $875 million of debt repayments over the next 12 months.

Gallagher commented: “Santos’ investment grade credit ratings provide access to a broad range of liquid global debt capital markets and this new Moody’s rating is further evidence of the stronger balance sheet created by the merger.”