Santos: Result 2014
Recommendation
Following the dramatic slump in oil prices investors expected impairments in Santos's full-year results – and they got them. The largest figure presented was the $2.3bn that Santos slashed from the value of some Cooper Basin fields and undeveloped coal seam gas projects. Interestingly, Gladstone LNG (GLNG), the project that caused the most concern, escaped without impairment.
That is a result mostly of aggressive accounting from Santos. Management could have written down assets from GLNG as its neighbour, BG, has done but it has clung to higher oil price assumptions, suggesting prices of US$70 a barrel next year. Although it's a view we happen to agree with, there is a case for being more conservative.
The impairment – or the lack of one – was the only surprise. Otherwise, the results were as expected.
Key Points
PNG LNG starts production
GLNG on track
An option on the oil price
Production volumes rose 6% to 54 million barrels of oil equivalent (mmboe), with PNG LNG contributing new output; about 50 LNG cargoes have already been filled and the project is ahead of schedule.
Revenue, which rose 12% to over $4bn, benefited from average recorded oil prices of $114 a barrel so oil revenue will be savaged next year. Santos earned about 50% of its revenue from oil last year, higher than average because of high oil prices. As LNG projects are completed, about 75% of revenue is likely to be oil-linked so persistently low oil prices will eventually hurt profits.
Some of that pain can already be seen from results in the WA business, which reported a 35% fall in operating profit to $635m. Profit from the Cooper Basin was, as always, steady and reliable. We expect returns from the Eastern Australian business to rise as gas prices increase from next year.
Year to 31 Dec | 2014 | 2013 | /– (%) |
Production (mmboe) | 54.1 | 51 | 6 |
Revenue ($m) | 4,037 | 3,602 | 12 |
Stat EBIT ($m) | (1,447) | 886 | (263) |
U'lying NPAT | 533 | 504 | 6 |
U'lying EPS (c) | 54 | 51 | 6 |
DPS | 35c, fully franked, ex date 25 Feb |
The Asian business was the star this year with operating profit soaring 130% to $743m reflecting the start of PNG LNG which alone contributed $500m in additional revenue.
Debt and dividends
Despite operating cash flow rising 13% to $1.8bn, Santos still drew down another $2bn of debt, taking total net debt to $7.5bn, a frightening sum. With lower oil prices sure to crimp cash flow next year the business is looking to sell assets and infrastructure to raise cash. Debt will peak shortly but should decline as GLNG cash starts to flow.
There was nothing in this result to change our view that Santos is stressed but cheap. We presented detailed estimates of potential cash flow for the business in Santos: under fire or under water on 17 Dec 14 (Buy – $7.58) and recommend reading that review.
Fancy modelling simply confirms what investors already know: that oil prices will determine the future for Santos. That leaves the investment case an easy one. Oil price bears – and there are many smart folks in that camp – can steer clear. For the bulls, Santos is an attractive option on the oil price. BUY.