Santos swings to half-yearly profit and restarts dividends
Oil and gas producer Santos reported net profit of US$ 104 million for the first half of fiscal 2018, a welcome reversal of its US$ 506 million net loss a year earlier.
Mentioned: Santos Ltd (STO)
Oil and gas producer Santos (ASX: STO) reported net profit of US$ 104 million for the first half of fiscal 2018, a welcome reversal of its $US506 million net loss a year earlier.
The company declared an interim dividend of 3.5 cents a share, its first shareholder distribution in two years.
The turnaround came hours after Santos agreed to buy Quadrant Energy for at least US$ 2.15 billion, expanding in Western Australia and grabbing a potentially big new oil find.
Underlying profit rose to $US217 million from $US109 million a year earlier, even after output was hit by an outage at the Papua New Guinea LNG plant following an earthquake.
“The results are a pleasing confirmation that the company is in effective turnaround mode, with earnings and cash flow growing. Net operating cash flow is ahead of our expectations.
"And payment of the first dividend in a while is always a good sign that a company’s numbers are genuine," says Morningstar senior equity analyst Mark Taylor.
Santos had suspended dividends in 2016, diverting cash to pay down debt which peaked for the construction of its Gladstone LNG project just as oil prices collapsed.
"We will shortly achieve our net debt reduction target, more than a year ahead of schedule, and therefore have a significantly stronger balance sheet to support our growth strategy," says chief executive Kevin Gallagher.
Santos cut net debt to $US2.44 billion by the end of June, and said it was on course to reduce this to below $US2 billion before the end of 2018 thanks to sharp cost-cutting and a rebound in oil and gas prices.
The company still expects 2018 production of between 55 and 58 million barrels of oil equivalent on growing output from its Cooper Basin assets and maintained its sales volume guidance of between 72 and 76 mmboe.
Santos' acquisition of Quadrant, the biggest domestic market gas supplier in Western Australia, is expected to boost free cash flow by around 17 per cent in 2019, assuming oil prices of US$65 a barrel.
The cash generated from Quadrant will help fund expansions in northern Australia and PNG and service the $US1.2 billion in debt it is taking on for the deal, according to Santos management.
Regarding the Quadrant purchase, Morningstar's Taylor says, “The acquisition is a really good one, it looks like a very sensible acquisition on a number of fronts. Quadrant’s assets are very complementary and the company isn’t buying anything unknown.”
Santos says Quadrant’s significant portfolio overlap with Santos will provide combination synergies of between US$30 million and US$50 million a year. The buy is fully funded from existing cash resources and new committed debt facilities with rapid de-gearing expected to be under 30 per cent by the end of 2019, which Taylor says, "Won’t break the bank".
According to Santos CEO Gallagher, the transaction lowers its proforma 2018 forecast free cash-flow breakeven oil price by a further US$4 [a barrel].
Santos’ share price was trading at $6.94 at time of publication, compared to Morningstar’s most recent $6.50 fair value estimate.
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Roger Balch is a freelance contributor for Morningstar Australia
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