UPDATE: Santos To Raise Up To A$3 Billion To Fund LNG Growth Drive

Santos Ltd. (STO.AU) said Monday it plans to raise up to A$3 billion from an equity raising and may sell a stake in its Gladstone liquefied natural gas project to help fund its gas export strategy.

Santos is already in a strong cash position, having sold 40% of its planned LNG processing plant at Gladstone in Queensland state to Malaysia's Petroliam Nasional Berhard, or Petronas, in May last year for up to US$2.51 billion.

But a steep fall in the oil price is putting pressure on energy company's balance sheets and Santos also has to help fund the construction of the US$11 billion Exxon Mobil Corp.-led PNG LNG project in Papua New Guinea.

The Adelaide-based oil and gas producer said it will raise a minimum A$1.65 billion from an underwritten institutional component of an equity raising, and may raise up to A$1.35 billion from a non-underwritten retail component. Shares are being issued at A$12.50 per share, which is a 27% discount to Friday's close at A$17.09.

PNG LNG, in which Santos currently has a 17.7% stake, will get A$1.05 billion of the raised funds, while another A$600 million will go towards redeeming some hybrid securities, called FUELS, that Santos issued in 2004.

The up to A$1.35 billion left over will be used to fund "other growth projects", including the Gladstone LNG project, Santos said.

Santos wants to make a final investment decision on Gladstone LNG by the end of the year and is currently trying to find LNG customers. Analysts say it could have a tough time considering that the LNG market has fallen into a ditch thanks to the global economic meltdown.

Santos, however, said Monday that marketing discussions are "at a reasonably advanced stage."

"Santos may, in combination with an offtake agreement, sell a further minority interest in the project," it said.

Chief Executive David Knox said in February that Santos could sell up to 9% of Gladstone LNG without permission from partner Petronas and Citigroup analysts have already flagged that they expect a further equity sale.

The PNG LNG and Gladstone LNG projects are two of nearly a dozen planned LNG facilities in the Asia Pacific region. Their construction is premised on supplying fuel-strapped Asian customers nearby with gas. PNG LNG, however, is making better progress, having already agreed to an offtake deal with a large Chinese customer, and is considered by most analysts as a frontrunner alongside the Chevron Corp.-operated Gorgon LNG project offshore Western Australia state.

Santos echoed recent comments by the other Australian PNG LNG partner, Oil Search Ltd., that the development is expected to reach a final investment decision in the 2009 fourth quarter.

Santos on Monday also reiterated its 2009 production guidance of 53 million-56 million barrels of oil equivalent, and said it intends to maintain its 2009 per-share dividend in line with 2008 which was 42 cents.

-By Ross Kelly, Dow Jones Newswires; 61-2-8272-4692; ross.kelly@dowjones.com

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