Santos chairman Peter Coates admits oil drop was a surprise

Santos chairman Peter Coates says the group did not fully anticipate the timing and depth of the oil price collapse.

Santos chairman Peter Coates

Santos chairman Peter Coates has admitted the group did not fully anticipate the timing and depth of the oil price collapse when letting its debt grow to $9 billion in support of its Gladstone and Papua New Guinea LNG investments.

But — writing yesterday in an internal memo to staff, following his return to a non-executive chairman’s role on new chief executive Kevin Gallagher’s first day in the job — Mr Coates said Santos was not alone in the shell-shocked industry.

“I accept that, when we made these key LNG investment decisions, like most in the sector, we did not fully anticipate the timing, speed and depth of the down cycle for oil prices we are currently enduring,’’ Mr Coates said.

Mr Coates said the LNG commitments needed to be assessed against long-term horizons.

“We are running a long-term business. Over the past five years, our multi-billion-dollar investments in PNG LNG and GLNG were made with this in mind,’’ Mr Coates told the workforce. “While they have required us to increase our debt level in the short term, we all know that they are by no means short-term projects. Any final judgment on the success of our LNG strategy should be measured through the oil price cycle and not based on a spot price today.’’

Mr Coates took on executive responsibilities last August in response to the freefall in Santos’s share price, itself a response to the collapse in oil prices and market fears over the group’s level of debt, which has now been reduced.

The departure of previous CEO David Knox was announced at the same time, as was an “all options to be considered’’ strategic review under Mr Coates in the executive chairman role.

The review flushed out a proposed $6.88-a-share takeover bid from the sovereign wealth fund-backed Scepter Partners but it was spurned by Santos.

Sweeping asset sales were also considered but only the $500 million sale of Santos’s interest in the Kipper gas interest in Bass Strait eventuated. Still, there has been recent speculation that Santos could revive attempts to sell its stake in the ExxonMobil-operated PNG LNG project.

But in his memo, Mr Coates said that in looking to the future “one of our key advantages is that our LNG assets have low operating costs’’.

“It is these types of legacy assets that will underpin the company’s fortunes over coming decades, and I am confident that this strategy will ultimately deliver an upside that is the envy of many in our industry.’’