Santos says investors are undervaluing the company in the wake of its big takeover of Oil Search late last year and will conduct a $US250 million share buyback to try and set things right.
At the same time, in justifying the need for a buyback and the basis for deciding when one will happen (or higher dividends), Santos has given a pretty clear indication that the current high level of oil prices are here to stay for some time to come.
It is also a sign the company can’t see the need to accumulate cash on its balance sheet for future projects, while also making sure that its cash flow is used to finance shareholders returns as well as future expansion and not left to attract the eye of governments here and offshore (such as in PNG).
News of the buyback came with an announcement of changes to its capital management framework which it said would help the energy company better balance investment and shareholder returns.
Santos said the initial on-market buyback, which is expected to start next month was part of a strategy “to maintain a disciplined, low-cost operating model that is designed to deliver strong cash flows through the oil-price cycle.”
Under the new capital management framework, Santos intends to pay 10-30% of free cash flow as dividends at an average Brent oil price up to $US65 a barrel (It’s around $US108 a barrel at the moment).
Above $US65 a barrel, Santos intends to use at least 40% of incremental free cash flow for additional dividends or share buybacks, so a big divi for the June half if that Brent price remains high.
Santos also said it would target a gearing range of 15-25%.
“The new capital management framework seeks to maintain an appropriate capital structure that enables Santos to balance the allocation of capital between investment in the business, the development of strategic growth and clean-energy projects, and the provision of sustainable returns to shareholders at higher commodity prices,” it said.
CEO Kevin Gallagher said the $250-million buyback also reflected the view that the “current share price undervalues the company.”
The 2021 annual results announcement explained the previous policy: “Santos’ sustainable dividend policy which targets a range of 10 per cent to 30 per cent payout of free cash flow.
That continues but the added extras indicate the company believes oil prices higher than $US65 a barrel for Brent 9and other indicators such as West Texas Intermediate, the US marker) will be with us for a while.
“The final dividend (for 2021) is franked to 70 per cent and substantially distributes the company’s remaining franking credits to shareholders. Based on the company’s carry-forward tax losses, Santos does not expect to generate franking credits for the next several years.”
The news fell on deaf ears in the market as Santos shares slid 1% to $8.23.
