Santos Ltd (ASX: STO) released its half-year results today, with revenue and underlying earnings boosted by the first production from the PNG LNG project. This has been closely anticipated as the first step in strong business growth for the energy producer, especially in light of the start of the GLNG project exporting LNG next year.
Revenue and earnings
The company reported a 25% increase in first half sales revenue, mostly due to higher production and higher oil and gas prices. First half underlying net profit was up 3% to $258 million, on top of $1.9 billion in revenue.
After a $67 million tax impairment charge, first half net profit was $206 million, down 24% on the previous corresponding period. Second half revenue and earnings will tell a better story about the PNG LNG production gains.
Dividends
The company is giving shareholders a taste of the new PNG LNG production by raising the interim dividend 33% to 20 cents per share fully franked. It plans to maintain or even increase upcoming dividends as earnings and cash flow increase. Investors can look forward to another dividend review near the time of the GLNG project start-up in 2015. The stock offers a 2.2% yield fully franked.
— PNG LNG project
Production first started in May at the PNG LNG project, which Santos has a 13.5% stake in, so production and revenue up to 30 June was included in the first half results. The project reached full capacity in July. Second half results will show the full benefit of six months' production for Santos. Project partner Oil Search Limited (ASX: OSH) (29% share) also reported a 34% jump in profit thanks to the project's new production.
Increased production
Average daily oil and gas production for the group spiked up in July to 164,000 barrels of oil equivalent (boe), higher than the 141,000 boe for the whole second quarter in FY 2014.
Managing Director and Chief Executive Officer, David Knox, said: "The first half of 2014 saw Santos achieve its highest oil production in six years, record sales revenue and strong operating cash flow. We have set the foundation for a stronger second half."
Santos Daily production
Source: Santos 2014. Half-year results presentation
GLNG project progress
The GLNG project (in which Santos has an approximate 30% stake) located in Queensland is on track for first LNG delivery in 2015. Currently, it is more than 85% complete. Along with the PNG LNG production, the GLNG is expected to cause a step-change increase in production and revenue.
Outlook and stock price
With 25 million barrels of oil equivalent (mmboe) produced in the first half, company guidance for FY 2014 full year production is 52 – 57 mmboe.
The stock has a price/earnings ratio of 25, which may not be too expensive when compared with the analyst consensus forecasts for earnings possibly rising an average 37% annually over the next two years. Revenue from the GLNG could make a big difference.
