Oil and gas giant Santos has become the latest local oil and gas group to take the axe to its balance sheet and slash the value of key assets because of the plunge in global prices is expected to continue for much longer than previously forecast.
Santos joins Woodside Petroleum, Oil Search and Origin Energy in cutting its outlook for prices which therefore forced impairment write downs in the value of key assets.
The reason for the lowered price forecasts is the current and expected impact of COVID-19 in future demand for oil and gas.
The largest non-cash impairment in Santos’ half-year results, to be announced next month will by a cut of up to $US700 million ($997 million) before tax at its Gladstone LNG project in Queensland.
The company said a further $US60-$US100 million would be written off the value of its exploration projects mainly in and around the Cooper and Amadeus Basins in central Australia.
Santos has slashed its outlook for benchmark Brent crude oil prices to as low as $US45 a barrel this year, $US49 in 2021, and rising to $US62.50 by 2024 and 2025.
That’s sort of in the same ballpark as estimates from Oil Search, Woodside, and Origin.
Global majors such as Shell and BP have also slashed book values although BP is a bit gloomier, estimating its future oil price at around $US55 a barrel.
The common story from these decisions and the reasons for them is that the companies believe the coronavirus-driven downturn – caused by travel restrictions and lockdowns – will hasten the world’s shift away from fossil fuels and that demand may never fully recover.
Santos CEO, Kevin Gallagher said in Tuesday’s statement that the company said had implemented a disciplined operating model focused on generating free-cash-flow through the oil price cycle. He said the company had started initiatives this year to reduce costs and target a 2020 free-cash-flow break-even oil price of $US25 a barrel.
“Our disciplined operating model combined with the proactive measures taken to reduce expenditure saw Santos generate more than $US430 million in free cash flow in the first half of 2020 despite significantly lower oil prices,” he said.
“Santos is well-positioned to leverage our growth opportunities when business conditions improve,” he said.
Santos shares rose 3.5% to $5.34 in the afternoon surge on the ASX yesterday.
