In a capital raising spree for its expansion activities, Australia's third largest oil and gas producer Santos has already gathered A$1.75 billion subscription from institutional investors against its rights issue announced on Monday.

The balance portion of A$1.25 billion, which is earmarked for retail investors is fully underwritten and is due for subscription from May 15 to June 9.

Santos said that the institutional part invited huge demand from domestic and international institutions and was heavily oversubscribed.
 
The issue price was fixed at A$12.50, which was at a 27 per cent discount to the share price before trading was halted. The offer promised two equity shares for every five shares held by eligible share holders.
 
Santos chief executive David Knox said they are delighted with the strong support from their institutional shareholders, and the proceeds would provide sufficient capital to meet the company's present requirement.

The amount raised is A$100 million more than the originally envisaged minimum target of A$1.65 billion. The underwriters JP Morgan, Deutsche Bank and Citi are convinced that they can easily sell any part not subscribed by retail share holders.

Santos will use the A$1.75 billion to fund its share of the Papua New Guinea (PNG) Liquefied Natural Gas (LNG) project, including A$600 million set aside for the early redemption of high-cost securities to strengthen the company's balance sheets and maintain the company's credit rating.

The A$21.5 billion ($16.5 billion) project managed by ExxonMobil is planned to export 6.3 million tonnes per annum of LNG from its two processing streams. Santos has a 17.7 per cent stake in the project. The company held a cash reserve of A$1.5 billion before the fund raising. 

With successful fund-raising, Santos would be in a comfortable financial position to go ahead with its other prestigious project, Gladstone LNG with the balance A$1.25 billion, without approaching the market again in the near future.

The company last week announced an investment of A$1.5 billion for exploration and development in 2009. (See: Despite price slump, Santos plans A$1.5 billion oil exploration investment in 2009)

The A$7.7 billion ($5.8 billion) Gladstone coal seam methane gasification project, the first of its kind on a large scale, is slated to produce 3.5 million tonnes of LNG per annum. Santos sold its 40 per cent stake to Malaysian oil and gas major Petronas for $2.5 billion in last May.

The retail component of A$1.25 billion alone will not be sufficient to keep the Gladstone project going. Company sources had earlier said that it could sell further up to 9 per cent stake in Gladstone LNG to generate more funds, while maintaining the 51 per cent controlling stake. The company has also plans to sell its Timor Sea assets off the northern coast of Western Australia.

A final investment decision on both the LNG projects, Gladstone and PNG are due next year. Of around twelve LNG projects envisaged in the Asia Pacific region, these two projects are considered to be front-runners along with Chevron's Gorgon LNG project, to meet the future demands of the energy-starved Asian nations.

Yesterday, the Santos shares resumed trading and fell by around 7 per cent to $14.47, still 15.8 per cent higher than the issue price.