Santos remains strong
STRONG LNG prices and a lift in production from its $2bn ConocoPhillips deal in northern Australia have helped Santos avoid the worst of the oil price crash in the June quarter, as the energy producer tightened output and sales volume guidance for the 2020 financial year.
The Adelaide company, midway through a critical public hearing on its proposed $3.6bn Narrabri gas project in NSW, said revenues fell 11 per cent to $US785m in the second quarter after the realised oil price more than halved to $US30.78 a barrel amid a global crude rout.
Still, LNG prices only fell 7 per cent to $US8.27 per million British thermal units with RBC noting Santos had outperformed its Australian rivals which sold LNG in a $US5$US7.50 BTU range and also beat the broker’s own $US7.80 estimate.
“Santos is also a clear standout to date in terms of its realised LNG pricing,” RBC analyst Gordon Ramsay said. “This highlights the robust nature of Santos’s LNG contracts, despite customers exercising contractual flexibility on LNG cargoes.”
The oil price drop outweighed record quarterly production which was up 15 per cent to 20.6 million barrels of oil (boe) equivalent after the ConocoPhillips deal completed in late May. That beat a consensus estimate from analysts of 18.9 million boe while the $US785m revenue was just ahead of $US776m consensus.
Production in 2020 has been tightened to 83 million-88 million boe from previous guidance of 81 million89 million boe while sales volumes was also tweaked to 101 million-107 million boe from a prior forecast of 101 million-109 million boe.
Santos picked up ConocoPhillips’s dominant stake in Darwin LNG and the BayuUndan, Barossa and Poseidon gas fields off northern Australia. The producer has deferred an investment decision on its $US4.7bn Barossa project over the oil plunge and coronavirus ructions.
A proposed selldown of its stakes in Barossa and Darwin LNG has been put on ice due to COVID-19 volatility, but RBC said a divestment was still important to cut Santos’s gearing levels of 34 per cent, which are the highest among Australian energy companies covered by the broker.
The producer said on Tuesday it would take a pre-tax writedown of up to $US800m ($A1.14bn) in its half-year results, with the value of its GLNG gas export project in Queensland slashed after the energy producer lowered its oil price assumptions to reflect the crude market crash.
It expects to record a noncash impairment on GLNG of $US640m-$US700m before tax, and a $US60m-$US100m hit after cutting the value of its exploration assets in the Cooper and Amadeus Basins.
Santos delivered free cash flow of $US431m in the first half of 2020 despite lower oil prices, the company said on Thursday.
“The operating model allowed us to maintain activities key to sustaining strong operational performance across all of our core assets,” Santos chief executive Kevin Gallagher said.
“As a result, we are realising lower costs from the initiatives announced in the first quarter and are targeting a free cash flow break-even oil price of $US25 a barrel for 2020.”
Santos’s impairment hit was due to lowering its longterm oil price assumptions by over 10 per cent resulting from the effects of the COVID-19 pandemic on energy market demand, but said the move had no impact on its oil and gas reserves.
It has a $US45 a barrel forecast for 2020 rising to $US49 in 2021 and gradually recovering to $US62.50 in 2025. Brent crude is currently trading at $US44 a barrel.
Santos shares finished Thursday up 19c at $5.65.