Santos about to make a comeback: video

SANTOS is fighting back to the top, with analysts viewing yesterday morning’s announcement that Gladstone LNG Train 2 has started producing on Curtis Island as a “critical” step towards boosting cash flows.

Anthony Barich

It also removes the lingering spectre of needing to raise more equity.

Sydney-based Dale Koenders, Citigroup’s head of energy and utilities research in Australia, was not surprised at this morning’s announcement as his firm had noticed pipeline flow data indicating the amount of gas supply into GLNG was increasing.

Citi believed this was indicative of the project starting within a fortnight, allowing Santos to meet its guidance in the second quarter of this calendar year.

This morning’s announcement follows first LNG production from Train 1 last September and GLNG’s first LNG cargo the following month. The project has already produced over two million tonnes of LNG and shipped 32 cargoes.

The start-up of GLNG Train 2 adds to Santos’ LNG portfolio, which also includes the Darwin LNG and PNG LNG projects.

Koenders said that for Santos (30%), which operates GLNG for co-venturers Petronas, Total (27.5% each) and Kogas (15%), the timely start-up of the project was “critical” to increasing the cash flow into the Adelaide-based oiler’s balance sheet and “deleveraging and de-risking the story”

“There was a risk that if GLNG did not start up as planned – and there is still a small risk, if GLNG Train 2 doesn’t actually ramp up towards nameplate capacity over the next 2-3 years they won’t de-leverage as quickly as planned,” Koenders told Energy News.

However, the analyst is adamant this won’t happen.

“I’m very confident of the project performing in line or better than company guidance,” he said.

“The Fairview field has performed substantially better than planning assumptions, which we think is the result of reduced drilling activity there.

“We expect the Fairview field will be able to produce in excess of planning assumptions for production very quickly, but ultimately the ramp-up of GLNG is dependent upon the ramp-up of Roma as well.

“We understand that the de-watering of Roma has been a little bit delayed.

“Once they’ve got through that ramp-up phase for Train 2, we expect that the project will be producing more like 80% of nameplate, then that final 20% will be dependent on the timing of Roma, which may take a further 1-2 years.”

Energy News understands Santos’ guidance for ramp-up for Train 2 has not changed, at 2-3 years.

GLNG’s nameplate capacity is 7.8MMtpa.

RBC Capital Markets said this morning the bank forecasts total 2016 production of 63 million barrels of oil equivalent, which is at the top end of Santos' guidance of 57-63MMboe.

“The timely start-up of GLNG T2 and the continuing strong performance of T1 is important to achieving our forecast CY16 production. We maintain our sector perform rating and $A3.50 price target,” RBC’s Ben Wilson said in a client note this morning.

Wilson also re-iterated that the de-risking of the GLNG project as it progresses to full production was material in growing Santos' cash flow and reducing its “still significant” debt load as the company works to stabilise its BBB- investment grade credit rating.

GLNG Train 1 delivered 958,000t – an annualised rate of 3.8mtpa versus nameplate capacity of 3.9MMtpa – in the first quarter, its first full quarter online, but Wilson said Train 2 would have a slower ramp-up profile than Train 1, in line with field ramp-up plans.

Koenders said the market would see a successful ramp-up of GLNG demonstrated over the next six to 12 months.

“Over this time you’re also likely to see cost-out being delivered in August, and those two issues combined will de-risk the cash flows coming into the company and help remove the risk of further equity raising,” Koenders added.

Santos’ new managing director Kevin Gallagher has already spoken about removing duplication roles and refocusing on profitability rather than growth.

In a client note on the lessons learned from Gallagher’s time at Clough, Citi flagged the potential to remove about $120 million per annum of structural costs out of Santos’ business, which will be about downsizing its office footprint internationally and nationally and reducing headcount.

Santos has already taken out 850 people, and is now down to a headcount of about 2900.

Historic moment

GLNG Train 2 is the fifth of six production trains on Curtis Island to start producing LNG, with just one train on the Origin Energy-ConocoPhillips operated Australia Pacific LNG project still to complete commissioning and start-up before the entire program moves into long-term operations.

At full production GLNG, APLNG and the now Royal Dutch Shell-owned Queensland Curtis LNG projects will produce more than 25MMtpa at nameplate capacity.

Alasdair Cathcart, general manager of Bechtel’s LNG business line, said successfully delivering LNG production units for its three customers on Curtis Island would go down among the “most significant achievements” in US giant’s 118-year history.

“Our teams have worked with the customers to overcome considerable challenges of megaproject construction, building the Curtis Island projects safely, on time and budget with the three facilities already producing above required capacity,” Cathcart said.

“I want to congratulate the entire team on this outstanding performance and continued focus as we work on bringing the last of the six trains on line safely and to the same quality our customers have experienced to date.”

Bechtel is responsible for about 40% of the world’s LNG liquefaction capacity currently under construction, and is also the principal downstream contractor for the Chevron-operated Wheatstone LNG project in Western Australia.

Wheatstone should start production next year, though had a hiccup earlier this month when the National Offshore Petroleum Safety and Environmental Management Authority refused the project’s start-up and operations environment plan.

Santos has been contacted about the progress of its Roma fields.