Santos: Interim result 2012

The evolution of Santos from a business dominated by Cooper Basin gas to higher margin output was illustrated by its impressive half year result. Although reported net profit fell a hefty 48% to $262m, the prior period included almost $300m of gains from asset sales. On an underlying basis, profit rose 20% to $283m. From earnings per share of 27.6 cents, a fully franked dividend of 15 cents was declared (ex date 28 Aug).

Profit was boosted by both higher volumes and, encouragingly, higher margin production. Production rose 11% to 25.4m barrels of oil equivalent. The Cooper Basin, traditionally the company’s profit engine, registered lower margins amid falling gas prices. New oil and gas assets in Western Australia, however, made up for the shortfall. Although revenues from the Cooper Basin were 50% higher, the WA assets generated earnings before interest and tax (EBIT) more than double that of the Cooper Basin. The margins tell the tale; EBIT margins in the Cooper were 17% compared to 54% in WA.  

The conventional business is performing splendidly but the market remains concerned about gas volumes at Gladstone LNG (GLNG) where flow rates continue to disappoint (lagging those of Origin Energy). More money is being directed into increasing production rates, but there is a greater risk Santos will be short on gas to supply contracted customers. That risk is keeping investors cautious and the share price down.

The company is responding by seeking gas supply agreements with third parties and stepping up the search for gas from outside Queensland. Crucially, that search is paying off; Santos reported successful production of shale gas from the Cooper Basin. This is vital. Huge volumes of shale gas can potentially be fed into GLNG to minimise the risk of a shortfall. Despite the share price rising 9% since Santos blows costs, market blows up on 02 Jun 12 (Long Term Buy - $10.81), Santos remains a LONG TERM BUY.