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Santos posts loss but sees better times ahead

Anthony Fensom  |  17 Feb 2017Text size  Decrease  Increase  |  

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Oil and gas company Santos Limited (ASX: STO) has posted a US$1.05 billion (A$1.4 billion) loss for fiscal 2016, after writing off US$1 billion from its Gladstone liquefied natural gas (GLNG) project.

However, the Adelaide-based company sees better times ahead, helped by rising oil prices, with analysts seeing the result as in line with expectations.

Revenue increased 6 per cent to US$2.6 billion in the year to 31 December, helped by record production and sales volumes, primarily from the start-up of GLNG and increased production from its Papua New Guinea project.

This was despite a 14 per cent decline in its average realised oil price to US$46.40 a barrel, and a 33 per cent drop in the average LNG price.

Underlying profit for the period rose by 29 per cent to US$63 million, with operating cash flow increasing by 6 per cent to US$857 million and free cash flow breakeven of US$36.50 per barrel.

Santos also slashed net debt by 26 per cent to US$3.5 billion, helped by US$447 million in asset sales, while its gearing ratio falling to 33 per cent, down from 39 per cent at the prior year-end.

Capital expenditure (capex) was cut by 51 per cent to US$625 million, while the company also cut 580 jobs.

No dividend was declared during fiscal 2016, although Santos said it would review this at its 2017 half-year results, depending on progress in reducing costs and improving free cash flow.

Managing director Kevin Gallagher said the company's restructuring in 2016 was starting to bear fruit, saying its turnaround strategy was "starting to deliver".

"In 2016, Santos was free cash flow positive at US$36.50 per barrel and generated US$370 million in free cash flow over the last eight months of the year. This is pleasing progress but there is still more to be done," he said.

"In 2017, we will further refine our operating model to drive costs down, improve cash flow and reduce debt," he added.

Gallagher said the company was now focused on five key natural gas assets, comprising the Cooper Basin, GLNG, PNG, Northern Australia and Western Australia, with each having "significant upside potential".

The company maintained its production and sales volume guidance at 55 to 60 mmboe (million barrels of oil equivalent) and 73 to 80 mmboe, respectively. The company expects to spend between US$700 million and US$750 million on capital expenditure in fiscal 2017.

Morningstar analyst Mark Taylor described the result as "pretty much in line with expectations".

"It was a modest improvement and should be viewed in the context of low oil prices in the first quarter, making the underlying result actually pretty impressive. The second half improved on the first, and GLNG is still in ramp-up phase, so there's a lot more to come in terms of profit and cash-flow improvement," he said.

"There's also been commentary about the potential for costs to have further room to fall, due to efficiencies in drilling and so on, so I'm fairly happy with the result overall."

He added: "There's been concern about the level of the company's own gas being used in the GLNG ramp-up, but it's not something that worries us, as we always thought they'd use third-party gas while they ramp up their own supplies."

"Also, there's been a feeling that the oil price improvement will simply stir a response from US shale operators and put a lid on the price--it will take more of a rise in the oil price to stir investors out of their complacency."

Santos shares closed on Friday up 2 cents, or 0.5 per cent higher at $3.99.

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Anthony Fensom is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. The author does not have an interest in the securities disclosed in this report.

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