Santos surprised investors yesterday with a new strategy and news that output will drop by around 10% in 2023.
Santos foreshadowed a decline in production next year, while increasing spending on major new gas and oil field developments as well as carbon capture and storage.
Output in 2023 is expected to be between 91 million and 98 million barrels of oil equivalent, down from guidance of between 103 million and 106 million boe (mmboe) this year, Santos said before the investor briefing started on Tuesday afternoon.
The news saw the shares slide more than 5% to $7.57 in afternoon trading.
Santos said there was no change to 2022 guidance which was being maintained at 103-106 million barrels of oil equivalent (mmboe) “and sustaining capital expenditure guidance is maintained at approximately $US1.1 billion.”
“Major projects capital expenditure in 2022 is expected to be approximately US$1.2 billion, the mid-point of the previous guidance range. 2022 unit production costs are expected to be at the lower end of the US$7.90-8.30/boe guidance range,” the company told the market
But 2023 will see a cut to the range of 91-98 mmboe, “influenced by the end-of field-life at Bayu-Undan (an offshore lNG project), timing of completion of the expected sell-down of a five per cent stake in PNG LNG and lower Western Australia domestic gas production,” according to the statement
Santos estimated sustaining capital expenditure next year at around $US1.2 billion and major projects capital expenditure is expected to be about $US1.835 billion (including the Barossa, Pikka Phase 1, Papua and Moomba CCS projects).
Santos is still waiting on the approvals process among shareholders in PNG LNG for the sale of 5% to Kumul Petroleum Holdings Limited for asset value of $US1.4 billion, including a proportionate share of project finance debt of U$US300 million.
“The offer is conditional on Kumul obtaining the waivers of certain pre-emptive rights by each other PNG LNG project participant under the project operating agreement to allow the transaction to proceed. Completion will be subject to customary conditions including necessary regulatory approvals and Kumul securing financing.
“Guidance for 2023 provided in this release and in the attached Investor Briefing Day presentation assumes Santos’ existing 42.5 per cent in PNG LNG. Guidance would be revised once the expected sell-down of the five per cent interest has completed,” Santos said.
The production downgrade took a lot of the shine off the big new strategy announced at the investor function by CEO Kevin Gallagher who reaffirmed Santos’ commitment to delivering strong shareholder returns and achieving net-zero emissions (scope 1 and 2, equity share) by 2040.
He said Santos’ new Purpose – to provide cleaner energy that is both affordable and sustainable to help create a better world for everyone – “is our future.”
“The energy transition journey that we have been on will only accelerate from here. We are building on our pioneering past to achieve our aim of creating a better world for everyone, through providing cleaner energy,” Mr Gallagher said. “Today we have unveiled our new strategy of Backfill and sustain – Decarbonisation – Clean fuels.”
“The successful execution of our Transform – Build – Grow strategy since 2016 has the company positioned for disciplined growth and sustainable shareholder returns. The business is performing well, with strong free cash flow generation of US$2.7 billion this year to the end of September.
“Energy security is a top priority for countries in our region. Given the strong customer demand for our product now and into the future, we will seek to backfill and sustain our core assets to deliver the critical fuels the world needs into the 2040s. But we will also decarbonise these critical fuels, in-line with our target of net-zero emissions (scope 1 and 2, equity share) by 2040, and produce clean fuels as customer demand evolves.
“To deliver the transition and our new Purpose, we have restructured the business into two divisions of Upstream Gas and Liquids and Santos Energy Solutions. In 2017, Santos set up an Energy Solutions team and today’s announcement is the next step in our plans to build our transition business, including our decarbonisation and carbon management services business, on our path to a cleaner energy future.
“We have a strong balance sheet supportive of disciplined growth and a business model to generate strong shareholder returns through the transition,” he said.
Investors missed that message while they fretted about the surprise downgrade in production next year. Santos’ ‘New Purpose’ got buried by the ’new’ news of the cut in 2013 production guidance.
