Oil and gas major Santos Ltd (ASX: STO) this morning reported its half-year results for the six months to 30 June 2015 and there were a few surprises waiting for nervous investors.
The good news
The good news is that Santos is profitable. The company reported a net profit of $37 million for the first half. This was down 82% over the prior period, but was certainly better than a loss given the difficulties facing energy producers.
Earnings Before Interest and Tax (EBIT) were down just 36%, but the company's financing costs grew significantly, eating into the result.
As expected, production for the six months grew by 13% and Santos re-affirmed full year production guidance of between 57 and 64 million barrels of oil equivalent (mmboe), while the cost to produce each barrel of oil (or equivalent) dipped by 11%.
Somewhat surprisingly, Santos elected to retain the interim dividend and pay out 15 cents per share. This is down from 20 cents per share in 2014 but represents a current dividend yield of 5.2%. Given recent investor concerns around the company's cash flow many investors will have expected the dividend to be dropped completely in favour of paying back debt.
The bad news
Significantly, Santos' results came paired with an announcement that the board is undertaking a "strategic review" which involves current Managing Director and Chief Executive Officer, David Knox, stepping down, but may also involve a review of current assets.
Also concerning was the big rise in net debt. Much like Newcrest Mining Limited (ASX: NCM), Santos holds a large amount of debt priced in U.S. dollars, which costs Aussie dollars to pay back, with the local dollar falling against the U.S. dollar. Santos' net debt jumped by a whopping $500 million and sat at $8.8 billion at 30 June 2015.
Added to this, the company's cash balance fell from $775 million at the same time last year to $399 million, a concern when the price of oil shows no sign of moving higher.
What to do now
No two words strike more fear into the hearts of shareholders than "strategic review". This is often a cause for concern, however given the negative outlook for energy producers at the moment it seems appropriate. Santos has a strong portfolio of energy-producing assets, however the company's ballooning debt is too big of a risk for my liking.
