Santos slashes dividend to fund expansion and new acquisitions

LOWER production costs and exploration spending helped offset the impact of lost production following asset sales, enabling Santos to lift the June half underlying net profit to $236 million from $210 million a year earlier.

By InvestSMART · 20 Aug 2011

By InvestSMART ·
20 Aug 2011

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Analysts had forecast a steady first-half profit of around $210 million. Adding in gains from the halving to 30 per cent of its equity in the $15 billion Gladstone liquefied natural gas project helped to push the net profit to a record $504 million for the half, lifting the earnings per share to 57.4? from 23.7?.

Despite the prosperity, the group's large spending program prompted a cut in the interim dividend to 15? a share from 22?, which is payable on September 30. Directors flagged no rise in the dividend until at least 2015 due to its large capital demands.

Santos recently launched a takeover of NSW coal seam methane group Eastern Star Gas, which will cost around $750 million, as it targets the Gunnedah basin to feed forecast gas demand in that state.

Santos also flagged its ambitions for the Zola and Finucane South/ Fletcher prospects in Western Australia, with an underwritten dividend reinvestment plan to raise $270 million over the next two years to fund further appraisal and development work there.

The final decision to develop the Finucane South/Fletcher find is due early next year, with the first production likely by the end of 2013. The promising Zola prospect needs further appraisal work, to get a better idea of its potential.

Additionally, $500 million is to be spent in the Gunnedah Basin, although earlier ambitions that this project could tap into the export market are likely to be shelved.

Nomura Australia analyst Xavier Grunauer said the results came in ahead of expectations, and the company would likely have a strong second half as well. "Unlike Woodside and Oil Search, which have large projects which take several years to come on stream, Santos has a number of near-term projects to maintain interest in the stock," he said.

Nomura has a "buy" recommendation on the shares, with a $16.10 valuation.

Santos will benefit from the start-up of the Chim Sao project in Vietnam (31.875 per cent Santos), Reindeer (45 per cent) in Australia and the Wortel project in Indonesia (45 per cent) in the next six months.

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Frequently Asked Questions about this Article…

Why did Santos cut its interim dividend and how big was the cut?

Santos cut its interim dividend to 15c a share from 22c to free up cash for a large spending program — including expansion, appraisal and development work, and recent acquisitions. The reduced payout is intended to help fund near-term projects and capital demands.

How did Santos perform financially in the June half and what drove the results?

Santos lifted its June half underlying net profit to $236 million from $210 million a year earlier. Gains from trimming to a 30% stake in the $15 billion Gladstone LNG project helped push reported net profit to a record $504 million for the half. Lower production costs and reduced exploration spending also helped offset lost production after asset sales.

What major acquisition is Santos undertaking and what is its purpose?

Santos launched a takeover of NSW coal seam methane group Eastern Star Gas at a cost of around $750 million. The acquisition targets the Gunnedah Basin to help feed forecast gas demand in New South Wales.

How will Santos fund its appraisal and development work for new prospects?

Santos has an underwritten dividend reinvestment plan (DRP) designed to raise about $270 million over the next two years to fund further appraisal and development, particularly for prospects like Zola and Finucane South/Fletcher in Western Australia.

What is the status and timeline for the Finucane South/Fletcher and Zola prospects?

Santos expects a final decision on developing Finucane South/Fletcher early next year, with first production likely by the end of 2013. The Zola prospect looks promising but requires further appraisal work to better understand its potential.

Will Santos still invest in the Gunnedah Basin and will it be for export?

Santos plans to spend about $500 million in the Gunnedah Basin. However, earlier ambitions for that project to tap into the export market are likely to be shelved, with a stronger focus on meeting domestic gas demand.

What upcoming project start-ups will benefit Santos in the near term?

Santos stands to benefit from the start-up of several near-term projects over the next six months, including the Chim Sao project in Vietnam (Santos 31.875%), Reindeer in Australia (45%), and the Wortel project in Indonesia (45%). These nearer-term projects support revenue and interest in the stock.

What are analysts saying about Santos shares and the company outlook?

Nomura Australia analyst Xavier Grunauer said Santos’ results beat expectations and predicted a likely strong second half, noting Santos has a number of near-term projects. Nomura has a 'buy' recommendation on the shares with a $16.10 valuation.