Santos rides record year on strong prices, volumes
The $24.4bn oil and gas giant will ‘deliver even stronger outcomes’ after posting record output and revenue as it works through a massive projects pipeline.
Oil and gas giant Santos will focus on selldowns to balance its projects portfolio and cut debt as it gears up to take advantage of “higher prices than we’ve ever seen before”.
Stronger commodity prices and higher volumes delivered record quarterly and annual sales revenues for the South Australia-headquartered business, which completed a $22bn merger with Oil Search last month.
The inclusion of Oil Search assets boosted fourth quarter production to 22.9 million barrels of oil equivalent (mmboe), leading to a record annual output of 92.1 mmboe.
Quarterly sales revenue rose 34 per cent to a record $US1.5bn with annual sales revenue up 39 per cent to $US4.7bn.
Annual sales volumes are 104.2 mmboe on updated guidance.
The highlight was LNG realised prices, with Santos’ portfolio price increasing by 32 per cent in the quarter to US$13.64/million British thermal units (mmBtu).
Santos’ LNG projects shipped 68 cargoes in the fourth quarter, of which 12 cargoes, majority from Darwin LNG, were sold at Japan/Korea Marker (JKM) spot prices.
“Santos’s strategy is not to focus on what the price is,” managing director and chief executive Kevin Gallagher said.
“Our focus is on maintaining as low as possible our free cash or break even price across all of our assets … (so) when oil prices do go up, we will maximise the margins and the cash flows from those assets.”
He said oil prices would continue to rise due to many years of supply being crunched against the backdrop of growing demand.
“So it’s going to take time for that supply side to catch up if it indeed it even does. What that’s going to mean, I believe, is through the cycle higher prices than we’ve seen for some time.
“And if we can control costs, we will take advantage of that.”
After record prices in the second half of last year, the value of the nation’s gas exports are likely to more than double in the current financial year, to $63bn.
Free cash flow is expected to be around $US1.5bn in 2021, more than double the level in 2020 and will be boosted further by the full integration of Oil Search.
“That cash is going to be significantly bigger over a full year period and that’s very exciting for us,” Mr Gallagher said.
“But what that helps us do, of course, is as reduce net debt across the business and provide those cashflows for growth projects going forward.
“The completion of the Oil Search merger delivers us the size and scale to deliver even stronger outcomes in 2022 and beyond.”
Santos has previously outlined synergies of up to $US115m a year amid expectations of job losses and the potential closure of Oil Search’s Sydney office.
It could potentially be looking to sell about $5bn worth of infrastructure assets – including its Quadrant Energy business in WA, its Barossa project in the NT and its stake in the Gladstone LNG project in Queensland.
GLNG delivered a record 6.4 million tonnes of LNG sales in 2021.
Santos also has a 42.5 per cent in PNG LNG, which produced 8.4 million tonnes of LNG for
the full-year and shipped 110 cargoes, slightly lower than the previous year due to the Covid-19 impact of deferral of maintenance activities from 2020 into 2021.
Bayu-Undan, located in offshore Timor-Leste and operated by Santos, delivered higher gross gas and liquids production in 2021, which enabled Darwin LNG to produce 3.2 million tonnes of LNG, all sold at lucrative spot prices.
A bigger balance sheet will also potentially help to navigate accelerating climate pressures and help it transition to a low carbon energy future.
In November, Santos signed off on its $220m Moomba carbon capture and storage project with one-third partner Beach Energy, which will see 1.7 million tonnes of carbon dioxide per year injected in depleted oil and gas reservoirs in South Australia’s Far North from 2024.
A CCS project is also proposed for Bayu-Undan.
Santos has a target of net zero emissions by 2040.
“The (longer term CCS) capacity for up to 20 million tonnes annually across the Cooper Basin is a game changer if we can make that work economically,” Mr Gallagher said.
“It would be way more than Santos ever emits in terms of Scope 1 and 2 emissions.”
Other major projects are also in the pipeline with 2021 capital expenditure guidance of $US835m (sustaining) and $US553m for growth projects.
This year Santos expects to make final investment decisions on its pushed-out Dorado liquids-only phase one project in the Carnarvon basin offshore Western Australia, which it operates with 20 per cent partner Carnarvon Petroleum, and Oil Search’s Pikka phase one project in Alaska.
Santos moved to full ownership of the controversial Narrabri Gas Project in NSW during the quarter by acquiring the remaining 20 per cent interest for a confidential consideration.
“There has been some misalignment for years with a partner on that project,” he said.
Legal battles had pushed the timelines on the project back 12 months, Santos said in October as it embarked on a 12-18 month appraisal drilling phase.
“For the first time in all my time in Santos, we’ve got a clean pathway in front of us to develop the project and so we’ll be getting on with it,” Mr Gallagher said.
The US$3.6 billion gross Barossa gas and condensate project to backfill Darwin LNG is 20 per cent complete and remains on schedule and on budget with first gas production expected in the first half of 2025.
It is also selling a 12.5 per cent interest in the Barossa project to JERA for $US300m.
Santos will announce full year results on February 16.