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Santos slugged by lower crude oil prices

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Matt Chambers | August 21, 2009
Article from: The Australian

OIL and gas producer Santos has reported a two-thirds drop in first-half profit as lower crude oil prices stripped $450 million from sales.

The Adelaide company also revealed it had slashed 660 jobs, including 320 that were not yet filled, as it focuses on cutting operating and capital costs.

Santos yesterday said first-half profit dropped to $101.7m, from $303.7m a year earlier, as average oil prices received plummeted from $113 a barrel to $52. Revenue fell to $1.05 billion, from $1.41bn a year earlier.

Santos's profit will be largely tied to oil prices for the next couple of years, with production treading water until 2013-14 when it expects a step change led by its planned Gladstone liquefied natural gas plant and the Exxon Mobil-run Papua New Guinea LNG project.

"The future remains tied to delivering longer-dated LNG projects, but represents a strong opportunity set for the company. It just needs to be delivered," Credit Suisse analyst Andrew Williams said.

Santos reported it was concentrating on reining in costs as it prepared for a big increase in production.

The company has cut 340 permanent and contractor positions, mostly from its head office and its South Australian Cooper Basin projects. It also said it would reduce the number of people it planned to hire by 320.

Santos said it had also managed to slice 30 per cent from more than half its key supplier contracts and was renegotiating developer contracts at its Reindeer project off the West Australian coast, and Chim Sao development in Vietnam.

Chief executive David Knox took umbrage at suggestions ExxonMobil's recent deal to sell 2.25 million tonnes of Gorgon LNG a year to Petrochina for 20 years, said to be worth $50bn, was Australia's biggest resources deal.

Mr Knox pointed to Santos's binding agreement with Petronas, its coal-seam gas-to-LNG partner at Gladstone, to sell up to 3 million tonnes of LNG a year.

"We firmly believe this is the largest (Australian) LNG deal signed this year," Mr Knox said.

Santos shares fell 41c to $14.65 yesterday.

The company's planned entry into the power generation sector has been delayed, with a final investment decision for the $800m Shaw River power plant in Victoria pushed back from late this year to early next year.

"FEED (front end engineering and design studies) will be completed by next year and at that stage we'll decide at what level of working interest (Santos will take) and whether we're going forward," Mr Knox said.

The company's recent Burnside gas discovery in the Browse Basin off WA, which could contain 500 billion to 3 trillion cubic feet of gas, would probably require another appraisal well before that range could be narrowed down, Mr Knox said.