Santos unveils new strategy, sets debt reduction target
Energy group Santos will separate second-tier assets from core natural gas operations as it targets deep cuts in debt.
Energy group Santos has followed peer Origin Energy in announcing a radical shake-up of its operations, with the group to separate its second-tier assets in a bid to realise the full value of its core operations.
The details, put forward at an investor day in Sydney, were revealed as Santos (STO) also said its full-year sales and production were likely to come in at the top of their respective forecasts ranges.
A new three-step strategy outlined by Santos boss Kevin Gallagher will focus on five core assets which include its long-life natural gas projects Cooper Basin, GLNG, PNG, Northern Australia and Western Australia Gas.
The five standout projects represent around 95 per cent of the group’s enterprise value.
The remainder of its assets will be run as a stand-alone operation within Santos and will be headed up by former AWE chief executive Bruce Clement.
Mr Clement will operate out of the South Australian-based group’s Sydney office, with the majority of assets under his command in New South Wales, Vietnam and Indonesia.
After a “tough couple of years”, Mr Gallagher said the new strategy showed the company had built a robust enough base to start eyeing growth once again.
“The business is getting stronger month-on-month as we take costs out and become more efficient,” he said.
“This provides a strong foundation for us to implement a new strategy and take Santos to a position where we can start to focus on growth rather than survival.”
The strategy shift follows a similar move by Origin Energy earlier this week that saw the energy producer and retailer focus on its primary energy assets and retail arm.
Its remaining oil and gas projects, worth around $1.8 billion, are slated to be hived off through an IPO next year.
In contrast, Santos was coy on its plans for the stand-alone non-core operations, noting only that it could “sweat or exit assets” while also reshaping capital investment.
However, it does pave the way for a float or sale of the division, if the market conditions are suitable.
Through the new “transform, build and grow” strategy, Santos said it would target a $US1.5 billion ($2bn) trimming of debt through 2019, designed to bring net debt under $US3bn.
“Our turnaround strategy also brings significant oil price leverage, with operating cash flow forecast to increase by $US300 million in 2017 for a $US10 per barrel oil price move above $US50 per barrel,” Mr Gallagher said.
Santos spruiked success in turnaround efforts so far that were forced last year as the oil price sank, with its break-even cash flow oil price dropping $US8 to $US39 a barrel.
Brent crude last traded at $US53 a barrel.
“Capital expenditure and upstream unit production costs have been reduced by 53 per cent and 17 per cent respectively, headcount has been reduced by more than 500 positions, and the business has been free cash flow positive for each of the last seven months,” Mr Gallagher added.
“It’s becoming a lean business that is cashflow positive throughout the cycle.”
In a brief update on its calendar year 2016 performance, Santos also noted sales would come in near the top of a 81-83 million barrels of oil equivalent forecast range, while production would be at the upper end of a range of 60-62 million barrels of oil equivalent.
Its upstream production cost is now seen below $US9 a barrel of oil equivalent, beating guidance for a range of $US9-$US9.50.
The company has enjoyed a strong showing on the local exchange in 2016 on the back of a tumultuous couple of years, with its shares up 18.5 per cent on the year-to-date.
Mr Gallagher, who took the helm of Santos in February after previously leading engineering firm Clough, has been working to restore investor confidence and repair the balance sheet. More than a year ago, the company rejected as too low a $7.14 billion takeover approach from Bermuda-based Scepter Partners that had the backing of sovereign investors and wealthy members of Asian and Gulf-based ruling families.
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