The Santos Ltd (ASX: STO) share price was up this morning after the company released its full-year results to 31 December 2016. With sharply lower operating costs and generating free cash flow, could Santos be worth a closer look? Here's what you need to know:
- Revenue rose 6% to $2,627 million
- Loss after tax of $1,047 million, primarily due to impairments
- Underlying profit after tax of $63 million
- Free cash flow of $370 million
- Production volumes of 61 million barrels of oil equivalent (mmboe), up 7% on prior year
- Average realised oil price of $46.40/barrel
- Santos generates free cash flow at prices above $36.50/barrel
- Net debt of $3,492 million
- Guidance for between 55mmboe and 60mmboe of production in 2017, and sales between 73mmboe and 80mmboe
(all figures in US Dollars)
So What?
After a tough couple of years and two capital raisings, Santos has been able to significantly reduce its cost of production, and post free cash flow and an underlying profit. By slashing its capital expenditure to the bone and lightening its debt burden a little, the company now feels it has the flexibility to focus on growing its five core assets.
Non-core assets in NSW and overseas (excluding PNG) will be managed by a new appointee with the goal of managing these assets 'with a mid-tier oil and gas company mindset to maximise value'. Although it wasn't mentioned in today's report, Santos could well look to float or otherwise sell these non-core assets in order to lighten the balance sheet and free up some more cash.
Now What?
At today's prices of US$55.65 per barrel, Santos is generating around $18 per barrel in free cash flow. Depending on where prices go over the next year, I expect the company could generate a respectable amount of cash over the coming 12 months. This will help strengthen its balance sheet while management focuses on identifying further opportunities at the GLNG plant and in Santos' main tenements.
Like a couple of other oil producers out there, Santos is looking interesting now that it is leaner and more focused. While the price of oil and demand for LNG remains a major uncertainty, Santos version 2.0 could be worth a closer look.
