Santos proceeds with $6b pipeline sale to relieve balance sheet

Santos proceeds with $6b pipeline sale to relieve balance sheet

Santos is pushing ahead with the potential $6 billion sale of a gas pipeline in Queensland, as it turns over every stone to take pressure off its balance sheet after the plunge in crude oil prices.

Chief executive David Knox said Santos’s GLNG venture in Queensland had hired Goldman Sachs to advise on a sale process, with the support of all venture partners.

Santos is also seeking a buyer for up to 30 per cent of its Gunnedah coal seam gas venture in NSW, and has not ruled out other asset sales as part of what Mr Knox described as a “comprehensive” response to the dive in oil prices.

Santos has frozen pay for employees and cut more than 500 jobs after the price collapse, which sent it into a $935 million full-year net loss because of write-downs.

More jobs will go over the next months, Mr Knox said, saying the losses were “not fun” but necessary.

Shareholders will also bear some pain, with the final dividend held at 15¢ a share, on a par with a year earlier but down from the 20¢ interim payout.

Most analysts had anticipated that Santos would repeat the 20¢ payout for the December half, in line with the “progressive” dividend policy it adopted last year. But chief financial officer Andrew Seaton said the board decided a lower dividend was the “responsible course of action”.

“I’m not sure how investors can look at that favourably when they said they were committed to giving an increased dividend, though I know times have changed in terms of oil price,” said Platypus Asset Management’s Anna Kassianos.

Santos shares fell 2.6 per cent to $8.03, underperforming the 1.6 per cent dip in the benchmark energy index.

The move to sell the GLNG pipeline follows BG Group’s successful $US5 billion ($6.4 billion) deal in December to sell a similar line to APA Group. Origin Energy is also looking at such a divestment for its Australia Pacific LNG venture and potential bidders are already lining up, with DUET Group managing director David Bartholomew declaring his company’s potential interest on Friday.

Santos’s loss for 2014 was due to post-tax write-downs of $1.56 billion. Underlying profit climbed 6 per cent to $533 million, about 2 per cent shy of consensus. Sales increased 12 per cent to $4 billion, thanks to the start-up of the $US19 billion Papua New Guinea LNG project.

“We look forward to further production growth in 2015 with the start-up of GLNG in the second half of this year, within the $US18.5 billion budget,” Mr Knox said. He said GLNG was cash flow positive at oil prices as low as $US40 a barrel.

Santos has already announced a $700 million cut to its 2015 capex budget in response to the oil crash, with spending now likely to be 44 per cent down on 2014. It set a target of cutting production costs per barrel by at least 10 per cent this year, though that would not cancel out the increase seen in costs through last year.

Fixed pay for 2015 has been frozen at 2014 levels, and Mr Knox and other Santos senior executives had a cut in their short-term incentive payouts. A 4 per cent average fee increase to directors that was due on October 1 last year has been put on ice.

Concerns about gas reserves

Santos’s annual reserves report did little to relieve concerns in the market about economic gas supplies for GLNG. Although reported reserves at GLNG increased for the first time in a few years, reserves fell again in the Cooper Basin.

“There is an increasing concern [about whether there are] sufficient reserves in the Cooper to meet the contractual requirements,” UBS analyst Nik Burns said. “Though as Santos pointed out, they can purchase gas from other parts of eastern Australia, bring it to Moomba, treat it and sell it into GLNG as well.”

Mr Knox said GLNG had enough gas, with 5600 petajoules of its own proven and probable reserves, 1800 PJ to come from third parties and 400 PJ of Santos gas to go to the project. In addition, contingent resources at GLNG brought gas volumes available for the project to about 9000 PJ, enough to fill both LNG production units for 20 years, he said.

Even so, GLNG may still buy more gas from third parties “if it made sense”, Mr Knox said, noting that Arrow Energy still had undeveloped resources with no decision on a route to market.

Ms Kassianos also voiced concern that Mr Knox could not categorically rule out that an equity raising may be needed this year if Santos is to defend its investment-grade credit rating.

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