Poor First half 2015 Performance: Santos Ltd (ASX: STO) revenues plunged 15% yoy to $1.6 billion (includes $263 million from third party product sales) in the first half of 2015 financial year, impacted by falling oil prices. Realized oil prices fell to USD 60 per barrel in first half of 2015 against USD 115 per barrel in the corresponding period of last year. But, STO’s EBITDAX decreased only 5% yoy to $900 million in the first half, as decrease in production costs as well as strong volumes had offset the lower average realized prices. But, Asia Pacific EBITDAX witnessed a major increase due to PNG LNG half-year of production. On the other hand, EBIT plunged 36% yoy to $226 million in the first half of 2015, due to 90% yoy increase in exploration expenses. Consequently, the net profit after tax fell 82% to $37 million in first half of 2015 financial year, against $206 million in the corresponding period of last year, affected by rising net finance costs, effective tax rate and lower capitalized interest. The net finance costs surged 172% yoy during the period due to rise in net debt levels and lower capitalized interest. The commissioning of key GLNG assets like the three upstream gas hubs and the gas transmission pipeline have decreased the capitalized interest in 1H15. Moreover, effective tax rate also increased to 63% in the first half of 2015, as compared to 33% in the corresponding period of last year.
Improving production to offset falling prices: The group’s overall production surged 13% yoy to 28.3 mmboe driven by better than expected production from PNG LNG and Darwin LNG as well as Cooper gas. LNG production soared 131% on a year over year basis in the first half of 2015, while the GLNG first LNG is estimated to be delivered by the third quarter of the fiscal year. Santos LNG sales revenue generated outstanding growth of 150% yoy to $448 million in the first half of 2015, driven by PNG LNG and Darwin LNG production performance. Meanwhile, Santos improved its production efficiency and was able to decrease its production costs per barrel of oil equivalent by 11% on a year over year basis. As per the GLNG project highlights, the development and commissioning of the initial upstream facilities as well as 420-kilometre gas transmission pipeline were finished during the period. Fairview wells performance as well as Roma well capacity were on track. Roma West Phase 2B project’s phase for upstream development has been approved in the last month.
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Rising Production (Source: Company Reports)
Conservative Balance sheet: Santos reported $2.2 billion in cash and undrawn debt facilities as at 30 June 2015, but the net debt increased to $8.8 billion in 1H15, as compared to $7.5 billion in pcp, due to decrease in weighted average interest rate on debt to 4.05%, against 4.7% in pcp. The weakening Australian dollar also contributed to the $500 million net debt increase. Operating cash flow also fell by 28% yoy to $532 million in the first half of 2015, affected by decrease in operating results. However, the group declared a fully franked interim dividend of 15 cents per share, payable on September 30, 2015.
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Net Debt performance in the first half of 2015 (Source: Company Reports)
Outlook
2015 Guidance: Santos forecasts a production growth in the range of 5%-18% for the full 2015 financial year, to 57 to 64 mmboe. Production costs is estimated to be in the range of $14.2 to $14.6 per boe. The group’s estimates its capital expenditure and production costs to decrease by 55% and 11% on a year over year basis. Santos intends to achieve $180 million gross supply chain savings by the end of this year. Meanwhile, STO expects a positive free cash flow by 2016 at USD 45-50/bbl oil at AUD/USD of 70-75 cents.
Santos Daily Chart (Source - Thomson Reuters)
Stock Performance: Santos shares have been under immense pressure (fell over 30.8%) over the last three months owed to falling oil prices. In fact the stock plunged 21.2% in just last four weeks on rumors of a possible equity raising by the company, weak first half of 2015 results and resignation by CEO. However, the group clarified that it has no plans of equity raising on August 17th. On the other hand, we believe that Santos is in heavily oversold zone, trading near its ten year low prices. The company has a solid dividend yield of 5.4% and is making efforts to offset the impact of oil prices by improving production and operational efficiencies. Any possible recovery of oil prices or Australian dollar would add support to the stock in the coming months. Based on the foregoing, we give a “BUY” recommendation to the stock at the current price of $5.30.
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