Santos asset sales a strong possibility

ANALYSTS believe asset sales are still on the cards for Santos to help cut its still considerable $6 billion debt pile after new CEO Kevin Gallagher yesterday morning admitted he had a long road ahead to return capital discipline to the company.
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Kevin Gallagher, Santos' incoming CEO

Anthony Barich

“It is essential that Santos rebuilds its exploration capability to find new reserves to provide future growth,” he said – a bold statement considering drilling in the Cooper Basin has all but ground to a halt with only Santos, Origin Energy and Beach Energy really doing anything of note there at the moment as oilers the world over are cutting back on exploration.

“This includes an assessment of targets in the Northern Territory and Queensland, and near-field exploration to deliver additional gas.”

Intentions

Noting Gallagher’s intention to resume exploration with the goal of better utilising existing infrastructure, RBC Capital Markets’ Ben Wilson said this morning he assumed this meant across Cooper Basin and Gladstone LNG where Santos has kit with ullage, and that could mean asset sales in non-core areas.

“We are uncertain when the next update on Gallagher's review will come, however, we recall being advised in February that if the review cannot identify cost savings and efficiency gains sufficient to lower the company's breakeven oil price to $US35-40/bbl the portfolio restructure is an option that can be revisited – we take this to mean asset sales,” Wilson said.

Having already implemented some senior management changes in a bid to collapse what Wilson called Santos’ “sprawling, decentralised” business unit model, the analyst said “organisational cultural change starts at the top and Gallagher seems to have acted swiftly in this regard”.

“We await further evidence of the degree to which cultural change can filter through the organisation and whether it can lead to a further [estimated] 20% reduction in the company's cost base as per Gallagher's goal,” Wilson said.

“While a 20% reduction may not seem a lot, Santos has already been in cost-cutting mode for the best part of two years. We assume that many easy wins have already been taken.”

Gallagher said his exploration team, led by Bill Ovenden, would do the “hard technical work” to define new resources that would either ultimately provide backfill for existing infrastructure or that would be developed as new projects.

He said head of development Brett Woods would provide the necessary capabilities to manage sustaining capital and to deliver the company’s development projects.

These include the opportunities in PNG, Darwin LNG backfill and the ongoing technical assessment of the Narrabri CSG project, which was the subject of police attention amid protests today.

New team

As chief operating officer, incoming director Vince Santostefano will build on last year’s production success that saw the company record its highest rate in seven years.

Santoestefano will also be in charge of driving “safe and low cost, reliable production” across the business to maintain and increase its revenue stream.

New head of commercial and business development John Anderson will oversee protecting and increasing Santos’ margins by reshaping the company’s portfolio and “prioritise assets and opportunities”

The other executive committee members, chief financial officer Andrew Seaton and new director Angus Jaffray, will work with Gallagher to support the executive team.

Ken Dean and Jane Hemstritch retired from the board after today’s AGM.

“Our objective is to create a good balance of conventional and unconventional projects to provide more stable returns throughout the cycle,” Gallagher said.

“Being a safe and reliable oil and gas supplier will provide the revenue that is key to debt reduction and exploiting future opportunities.”

Restructuring

However, while opportunistically looking ahead beyond the current restructuring to become flexible enough to “take advantage of future opportunities”, Gallagher also warned that Santos needed to “be careful not to over-extend ourselves in terms of debt”

So loading up with more debt is out of the question, and he did not flag any other means of raising money other than increasing operating revenues.

This will be done with a new asset-based management structure with “strong technical capabilities in exploration, development and production”

The restructure will be complete within months, with the near-term strategy to stabilise the business, reduce debt and “put the right framework in place to become a low-cost, reliable and high-performance business”

Having strengthened the balance sheet in November with $3.5 billion worth of initiatives to cut its debt by about a third, Gallagher said Santos still needed to ensure the oiler lives within its means, with the aim of becoming cash flow break-even at between $US35-40/barrel on a portfolio basis.

“It is clear there is a lot to do,” Gallagher said.

Santos managed to lower production costs per barrel by 10% last year and cut capital spend by more than 50%, with liquidity of more than $A4 billion in cash and undrawn facilities.

LNG hope

Meanwhile, Santos chairman Peter Coates talked up the wisdom, even in hindsight, of its $US18.5 billion GLNG investment which saw the company load up on debt, as did many majors across the world in betting big on major projects when oil prices were multiples of what it is today.

“Any final judgement on the success of our LNG strategy should be measured through the oil price cycle, rather than today’s spot price,” Coates said.

He said Santos multi-million-dollar investments in Papua New Guinea and Gladstone LNG were made with the belief that the company is a “long-term business”

“While they required us to increase our debt level in the short-term, they are by no means short-term projects,” Coates said.

GLNG has to date shipped more than 25 cargoes and produced more than 1.5MMtpa of LNG.

Profit plans

As analysts wait on more detail on just how Gallagher plans on returning the company to profit having made an overall loss of $A2.7 billion last year following asset impairments of $2.8 billion, Coates said the company would hand at least 40% of its underlying net profit back to shareholders as dividends despite a rough year of falling oil prices.

“This will better reflect the company’s exposure to oil-linked LNG pricing and the cyclical nature of global oil markets,” Coates said.

The fully-franked final dividend of 5c per share was as forecast at the time of the equity raising in November last year.

“The board believes the new dividend framework is the most appropriate way to deliver short-term returns to shareholders,” Coates said.

“This is consistent with our objective to manage through low oil price environments.”

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