Santos joins energy writedown club with $1bn hit
Santos has slashed the value of its gas export project as low oil prices batter the sector and reignite fears about stranded energy assets.
Santos will take a pre-tax writedown of up to $US800m ($1.14bn) in its half-year results, with the value of its GLNG gas export project in Queensland slashed after the energy producer lowered its oil price assumptions to reflect the crude market crash.
The Adelaide-based company will take a non-cash impairment on GLNG of $US640-700m before tax, and a $US60m-100m hit after cutting the value of its exploration assets in the Cooper and Amadeus Basins.
GLNG was regarded as a “strong candidate” for a writedown given it has never produced to its nameplate capacity of 7.8m tonnes a year, RBC noted.
“There is also a precedent provided by Origin’s nearby APLNG project, which recently took a $720-770m impairment charge. APLNG has higher output capacity and approximately double the amount of 2P coal seam gas reserves supporting it, in comparison to Santos GLNG project,” RBC analyst Gordon Ramsay said.
With Santos part way through a critical public hearing over its proposed $3.6bn Narrabri gas project in NSW, the writedown may also reignite concern among critics who are worried over the potential for stranded gas assets amid a shift among investors away from fossil fuels.
“Today’s writedown by Santos – on the back of Royal Dutch Shell, Woodside and Origin writedowns – is a clear demonstration that oil and gas assets are being stranded right now,” Australasian Centre for Corporate Responsibility climate director Dan Gocher said.
“Santos is prepared to sacrifice the climate and local communities on the slim chance that the Narrabri gas field may be profitable in the hope that business conditions improve. These gas assets will eventually be stranded. Santos must see the writing on the wall and abandon the Narrabri project before burning any more shareholder capital.”
Global major BP, which in June took a writedown of as much as $US17.5bn, slashed its long-term energy price assumptions and even warned it may leave oil and gas in the ground amid a fast-moving transition away from fossil fuels.
Santos said the hit was due to lowering its long-term oil price assumptions by over 10 per cent resulting from the effects of the COVID-19 pandemic on energy market demand. But it said the move had no impact on its oil and gas reserves. It has a $US45 a barrel forecast for 2020, rising to $US49 in 2021 and gradually recovering to $US62.50 in 2025.
The move will increase its gearing by 1.5 per cent, with the producer maintaining its debt covenants have sufficient headroom and “are not under threat at current oil prices for a number of years.”
Nearly $20bn has been dusted in writedowns and charges on Australian and Papua New Guinea projects run by Woodside Petroleum, Shell, Origin Energy and Oil Search so far in July, as some of the nation’s biggest gas producers adjust to an uncertain outlook for the fossil fuel.
Crude prices have doubled from record lows recorded in April to trade at $US44 a barrel, but even at those improved levels many projects remain marginal. Producers have responded by lowering their price assumptions, triggering giant writedowns of oil and gas assets, to reflect a collapsing demand outlook as COVID-19 continues to roil the market.
The next wave of major developments worth in excess of $50bn now faces fresh uncertainty too. Woodside last week delayed its $US11.4bn ($16.3bn) Scarborough to Pluto development until the second half of 2021 while a decision on the go ahead for the long delayed $US20.5bn Browse project now won’t be made until 2023. Santos has also deferred an investment decision on its $US4.7bn Barossa project over the oil plunge and coronavirus ructions.
“Santos is well positioned to leverage our growth opportunities when business conditions improve,” chief executive Kevin Gallagher said.
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