Shares in Santos jumped sharply on Wednesday as its annual profit more than tripled – as expected – because of the surge in oil and LNG prices over 2022 that is fading as we head deeper into 2023.
The boost from the Oil Search takeover in late 2021 which grew oil and natural gas production in Papua New Guinea, more than offset recent setbacks in Australia, especially on the Northwest Shelf and Timor Sea.
Santos reported a net profit of US$2.11 billion for the 12 months thanks to the Oil Search takeover giving it a bigger equity interest in the PNG LNG export facility led by Exxon Mobil.
Santos reported annual revenue of $US7.79 billion, while free cash flow more than doubled to a solid $US3.64 billion.
Directors declared a final unfranked dividend of 15.1 US cents per share, up 78% from a payout of 8.5 US cents a year earlier. With the 38% higher interim of 7.6 US cents per share, the total of 2022 is 22.7 US cents, up more than 50% on the 15 US cents paid for 2021.
Santos doubled the size of its current share buyback program to $US700 million in 2022, while also introducing a revised capital management framework. The new policy involves returning at least 40% of free cash flow to shareholders each year, comprising cash dividends or share buybacks, or a combination of both.
Directors have also said they will consider returning additional returns from asset sales, and analysts the company remains in talks to for$US$1.4 billion sale of a 5% equity stake in the PNG LNG project to Kumul Petroleum Ltd.
“Strong free cash flows mean we are in a position to deliver higher shareholder returns through an increase in the final dividend and previously announced increase in the on-market buyback, consistent with our disciplined capital management framework,” CEO Kevin Gallagher said on Wednesday.
But is this the top?
While oil prices remain elevated, the price of the key Brent crude benchmark ended 2022 at $US86.91 and has traded lower to close Tuesday at $US82.50 a barrel. That’s a huge fall from the $US127 a barrel high last March in the immediate aftermath of the Russian invasion of Ukraine a year ago.
Likewise, LNG prices have slumped to be trading in northern Asia (which prices gas sold into Japan, South Korea, Taiwan and parts of China) at just under $US16 a million British Thermal units (MMBTu). LNG prices in Asia had peaked at close to $US70 per MMBTu last August.
And in Europe, the price of gas has fallen to less than $US50 a megawatt hour compared with a peak last August above $US330 a megawatt hour last August.
In 2022, Santos benefited from energy prices rising in the wake of Russia’s invasion of Ukraine. The war led to a redrawing of supply routes amid concerns around fuel security as European countries feared they would run short of oil, gas and coal.
That didn’t happen and the key supplies of gas are now more plentiful across Europe than they were before the invasion.
But as dramatic as the impact on the financial side of Santos’ business has been, its local operations have been hit by a series of technical and regulatory hiccups.
A gas leak in a pipeline connecting the John Brookes platform off the Northwest WA coast in late November has proven hard to repair and Santos said earlier this month it does not expect the repairs to be complete until late February. That has impacted the supply of gas to WA and has sparked talk of legal action from consumers forced to pay more than expected.
That saw Santos produce 103.2 million barrels of oil equivalent in 2022, at the lower end of original guidance for 100 million-110 million BOE.
The problems at the John Brookes platform have also delayed the start of production from the Spartan field, which is now expected to happen in the second quarter.
The company has also seen a setback in its development of the Barossa natural-gas project offshore Darwin in the Timor Sea.
In September, a Federal Court judge threw out a regulator’s approval of Santos’s environmental plan to drill for natural gas there after an indigenous leader on the Tiwi Islands argued Santos didn’t properly consult his clan on its impact.
Santos, which wasn’t successful in its appeal of the ruling, now expects to resubmit its drilling activity environment plan late this year.
That has Santos has lowered its production guidance for this year to 89 million-96 million BOE, from a previous range of 91 million-98 million BOE.
The potential 12% drop in production and the steady to lower oil and gas prices means Santos will be hard pressed to repeat the bonanza year of 2022.
Santos shares ended the day up more than 3% at $7.02.
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Meanwhile the cut to the $9 a share suggested takeover offer for Origin Energy has turned out to be something of a damp squib.
The bidders – Brookfield and the LNG arm of private-equity firm EIG Global Energy Partners – trimmed their mooted price by just 10 cents a share to $8.90, which is hardly the swingeing slash that some overexcited brokers, analysts and media writers suggested might happen.
Despite the small cut, Origin was supportive of the offer, saying in Wednesday’s statement that it “has the potential to deliver significant value to shareholders, and accordingly, intends to continue to progress discussions with the Consortium, including the negotiation of a Scheme Implementation Deed, while assessing the execution considerations and risks associated with the revised proposal.”
Origin is a major shareholder in the Australia Pacific LNG plant in Queensland exports LNG mostly into Asia. The facility is operated by ConocoPhillips and has benefited from 2022’s high prices of LNG after Russia’s invasion of Ukraine, though those prices have slumped heavily in 2023.
Origin is also a domestic power utility and distributor and retailer and if the bid happens and is successful, that’s the business Brookfield would buy.
MidOcean Energy, the EIG unit, would own Origin’s Integrated Gas business, which includes its 27.5% interest in the Australia Pacific LNG project.
Last year, Origin tried to sell a 10% stake in the Australia Pacific LNG project to EIG for $A2.12 billion but the deal didn’t happen because ConocoPhillips exercised its pre-emption rights to acquire the interest instead.
Origin shares leapt more than 12% to $7.90 on the news, well under the lowered new price and a strong hint the market remains sceptical at the moment that the deal will be done.
