Softness in First Half Result: Santos Ltd (ASX: STO) recently announced a 2016 first half net loss of US$1,104 million, impacted by the previously announced impairment charge for GLNG of US$1,050 million after tax and lower oil prices. The underlying net loss was of the order of US$5 million after tax (excluding impairments and other one-off items). However, STO at the same time reported for a record production (up 10% over 1H15) and significant cost reductions achieved in the first half with unit upstream production costs slipping by 15% to US$8.80/boe and capital expenditure down by 58% to US$283 million. The stock fell about 6.8% on August 22, 2016 while the company decided for no interim dividend payment.
1H FY2016 Performance (Source: Company Reports)
Heavy impairment costs against GLNG: STO had already reported that they would incur a heavy impairment charge from the carrying value for GLNG of over US$1,050 million after tax (about US$1,500 million before tax) for its 2016 half-year performance. But the group reported that this would be a non-cash charge and would not impact their debt facilities. On the other hand, the group is controlling its capital expenditure wherein its first half capital expenditure reached US$283 million, which is 58% less as compared to the same period of last year.
Santos control in its capital expenditure (Source: Company Reports)
Cash flow scenario: One of the key factors that investors needed to note was whether the group would be able to meet its cash flow estimates despite facing impairment charge for GLNG coupled with ongoing tough market conditions they are facing given the volatile oil price environment. The group targeted for a positive cash flow for this year in November 2015. On the other hand, the oil prices have fallen a bit since last year while US dollar strengthened further against Australian dollar. Given these conditions, the group’s target of positive cash flow this year was seen to be challenging. However, the company said that it has made a good progress in the first half and is forecasting a free cash flow breakeven oil price of US$43.50 per barrel for 2016, down from US$47 per barrel. The new operating model is said to lift productivity and drive long-term value for shareholders in a low oil price environment.
Update on ramp up in production of GLNG: Management had reported that they would continue to face pressure given the ongoing tough market conditions in LNG market. The group is increasing its production of GLNG equity gas cautiously while the third party gas price has increased. Accordingly, Santos is adjusting their assumptions regarding upstream gas supply and third party gas pricing. But the group assured that this would not impact their GLNG’s ability to meet its LNG off-take commitments. Santos is constantly striving to cut costs while pursuing opportunities to optimize their asset portfolio. Moreover, the group is focusing on a long term basis for its GLNG project and we believe that the group is well positioned to face these hurdles. Management is forecasting a better LNG market in the long term, and accordingly, Santos is positioning to be a key supplier of LNG and targeting growing demand from the Asian market.
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