Santos to move ahead with Alaska oil deal and sell 5pc stake in PNG LNG plant as profit soars

Santos approved its $US2.6bn ($3.7bn) Alaska oil project after more than tripling first-half profits, saying the global energy crisis had sparked a rush for new supplies.

An oil pipeline stretches across the landscape outside Prudhoe Bay in North Slope Borough, Alaska. Santos will push ahead with its Pikka development in the region. Picture: Getty Images

Santos approved its $US2.6bn ($3.7bn) Alaska oil project after more than tripling first-half profits, saying the global energy crisis had sparked a rush for new supplies, while delaying a major West Australian development due to high costs and supply chain snags.

Russia’s invasion of Ukraine sent markets and commodities into a tailspin and underscored the need for more fossil fuel volumes as nations increasingly prioritise security of supply, chief executive Kevin Gallagher said.

“The world has changed a lot in the last six months,” Mr Gallagher said. “There’s a big focus on energy security that wasn’t really there in February and the world has changed very considerably.”

The South Australian producer had until now been hawking part of its 51 per cent stake in the Alaskan Pikka project to potential buyers after scooping it up from Oil Search following the pair’s $21bn merger in December.

But after failing to land a selldown, Santos has decided to sanction the project and foot $US1.3bn of the bill, targeting 80,000 barrels a day of crude to start flowing from 2026. Santos has promised a 19 per cent internal rate of return at a $US60 per barrel oil price. Brent crude is currently trading at $US92 a barrel.

A sale of its share remains on the cards during the development phase, potentially following the model of its Barossa facility in the Northern Territory where an equity sale to Japanese investors was not made until well after a final investment decision.

Still, the deal surprised some analysts given the challenges of executing a greenfield operation in Alaska and the potential backlash from investors after the International Energy Agency said no new oil or gas fields should be opened up if the world is to reach net-zero emissions by 2050.

“It’s disappointing to see Santos has not only taken a final investment decision on Alaska, but without a selldown to validate value,” Credit Suisse analyst Saul Kavonic said. Poor environmental optics may deter “new investors and high execution risk given Santos has never operated in Alaska before in a challenging environment more suited to the majors amid inflationary pressures.”

Santos chief executive Kevin Gallagher. Picture: Simon Cross

High costs and supply chain uncertainties also forced Santos to delay the timeline for deciding whether to sanction the $US2bn Dorado offshore project in WA.

Santos said four weeks ago the development would be “final investment decision-ready” in the second half of 2022. However, it has now blamed an inflationary cost environment and supply chain uncertainties as “not supporting a final investment decision in 2022”.

Santos owns 80 per cent of Dorado and operates the project. Shares in Carnarvon Petroleum, which holds the 20 per cent balance, fell by 13 per cent on Wednesday.

“Particularly just after the invasion of Ukraine, we just saw that project as having a higher risk at this point in time,” Mr Gallagher said, noting both WA and offshore pressures on contractors. Dorado, located in the Bedout sub-basin offshore WA, was hailed in 2018 as one of the biggest discoveries ever made on the North West Shelf with plans to produce 75,000 to 100,000 barrels of oil a day.

Santos had been tipped for more than $4bn of equity selldowns both to cash in on booming energy markets while also trimming its own capital outlay as projects move to the drilling and production stage.

At the top of the pile is PNG LNG, the Port Moresby gas export plant, with Santos confirming it was in “advanced discussions” with short-listed buyers for the sale of a five per cent stake which would lower its ownership to 37.5 per cent.

Santos beat expectations by tripling first-half underlying profit to $US1.26bn compared with expectations of $US1.19bn due to high energy prices and its bigger PNG LNG stake following the Oil Search deal.

It flagged $US605m in shareholder returns split between a 38 per cent rise in the interim dividend to US7.6c a share and a $US100m boost in a on-market share buyback to $US350m.

However, analysts said the dividend payment was lower than forecast.

“The interim dividend was softer than market expected but a further $US100m added to buyback helps lift payout closer to expectations,” UBS analyst Tom Allen said.

The company is among three major LNG exporters under the spotlight over sending gas offshore amid a domestic squeeze, particularly in Victoria this winter.

Mr Gallagher slammed the previous Coalition government for its “chest beating” approach to energy policy and rejected forecasts of a gas shortage on the east coast in 2023.

The company’s shares fell 2.1 per cent or 15c to $6.93.

Originally published as Santos to move ahead with Alaska oil deal and sell 5pc stake in PNG LNG plant as profit soars