Santos

Although another year of floods in the Cooper Basin led to lower production, higher oil and gas prices propelled Santos' profits higher. Revenue for the full year rose 14% to $2.5bn resulting in an impressive 27% increase in earnings before interest, tax, depreciation, amortisation and exploration (EBITDAX, a measure of field performance) to $2.1bn. After stripping away the effect of asset sales, including the 15% selldown of Gladstone LNG (GLNG), underlying profits rose a more sedate 20% to $453m, translating to earnings per share of 48 cents from which a fully franked 15 cent dividend was declared (ex-date 24 Feb).

Despite stable operating cashflow of $1.2bn, new project construction devoured it all and then some; capital expenditure for the year rose 22% to $3.7bn, the bulk of it on LNG projects. Those projects – PNG LNG and GLNG – will result in a significant production boost from 2015, when we estimate output will rise to over 70m barrels of oil equivalent (mmboe), from about 50mmboe today. Most of that new output will be based on oil prices rather than gas which should boost margins. Higher output at higher margins bodes well for the future.

News from the stalwart Cooper Basin was also encouraging. Long considered a dying asset, Santos is intent on its resurrection; hi-tech drilling equipment has been mobilised to expand resources and test deep buried shales for gas.  This is sensible. With ownership of key infrastructure (such as the Moomba processing plant) and access to the best resources in the basin, Santos is ideally place to commercialise discoveries. The market remains doggedly sceptical, but our investment thesis for Santos is on track. The share price has risen 5% since Slowly begins the gas boom on 16 Nov 11 (Long Term Buy - $13.41) and, although it’s not far from a downgrade, Santos remains a LONG TERM BUY.