By Sarah Byrne
AUSTRALIAN oil and gas producer Santos has reported a net full-year loss of $935 million, after it recorded impairments of $1.56 billion (after tax) against its assets.
The impairments – which related to oil producing assets in the Cooper basin and exploration licences near Gunnedah, in New South Wales – put paid to Santos’s underlying net profit of $533 million, up 6% on the previous year.
No impairment was recorded against the Gladstone LNG project (GLNG), which Credit Suisse oil and gas analyst Martin Kronborg told Oil & Gas Australia was a surprise.
Santos’s move to forecast the price of oil at $100 a barrel by 2019 had kept two of the companies highest cost assets from incurring impairments, he said.
“They [Santos] are saying they expect the price to be $100 in 2019 (nominal), which is a generous assumption, if you use the forward curve, you would probably assume the impairment they have to take would be larger.”
Mr Kronborg said Credit Suisse forecasted oil prices of $85 a barrel by 2019, with the forward curve sitting in the low $80s.
Mr Kronborg raised concerns that if the price of oil remains low it may become a problem for the company considering the relatively high cost of the GLNG project.
“If the price of oil remains low they won’t be making as much money over the next few years and that is a major problem because their balance sheet is incredibly stretched,” he said.
Santos said its GLNG project is more than 90% complete and on track for the first LNG in the second half of 2015, remaining within the project’s US$18.5 billion budget.
The company announced a capital expenditure (CAPEX) forecast of about $2 billion for 2015, 44% lower than the previous year, and expects to reduce production costs per barrel by 10%.
This came at a time when Santos chief executive David Knox said the company had delivered its highest production in five years, as well as record sales revenue and strong operating cash flow.
“Our results today reflect the many achievements of the company in 2014, highlighted by the start-up of PNG LNG ahead of schedule and the commencement of commissioning the GLNG project,” Mr Knox said.
“We will continue to proactively manage our costs, both capital and operating, in line with the current market environment,” he said.
Santos has removed 520 positions to date and has reported a recruitment freeze and flagged further staff cuts.
“The bottom line result nevertheless reflects the impact of the unexpectedly sharp down-turn in oil prices towards the end of the second half in particular which saw us recognise significant non-cash asset impairments announced earlier this month,” Mr Knox said.
Growth in production and sales revenue was partially a result of the ExxonMobil operated PNG LNG project successfully starting up in mid-2014 and then ramping up in the second half of the year, he said.
Mr Kronborg said it would be interesting to see how the company maintains production after GLNG ramped up, because “some of the CAPEX cut is sustaining CAPEX and when you cut sustaining CAPEX you have to assume production is going to go down because you can no longer sustain the same amount of production.”
In addition to this, the group’s net debt rose to $7.5 billion during the year, $900 million above consensus estimates, adding that this was a “very high debt level” for an oil and gas company of its size.
Much of the debt had come from the Australian dollar translation of a United States (US) dollar denominated debt – with a weaker Australian dollar driving up the value of the US dollar debt.
“The Australian dollar had depreciated substantially around 13 per cent since the company had previously reported, meaning the Australian debt number would be a lot higher,” he said.
Despite higher debt levels, Santos had maintained a final dividend at 15 cents per share, taking the total year’s payout to 35 cents, which is up 5 cents on the previous year.
At the end of 2014, the company reported approximately $2.9 billion in cash and undrawn debt facilities available.
Mr Kronborg said 2015 and 2016 would be challenging years for Santos as it suffered greater impacts from the low price environment compared to other Australian producers, as a result of its relatively high cost assets.
Santos didn’t respond when contacted for additional comment.