Why the Santos (ASX:STO) share price is dropping lower

Here's why the Santos Ltd (ASX:STO) share price is dropping lower on Tuesday…

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The Santos Ltd (ASX: STO) share price is dropping lower this morning after softening oil prices offset the release of a positive announcement.

In morning trade the energy producer's shares are down 2% to $6.31.

What did Santos announce?

This morning Santos provided the market with an update on its Bayu-Undan Joint Venture.

According to the release, the company has made a final investment decision and will push ahead with the US$235 million Phase 3C infill drilling program at the Bayu-Undan field in the Timor Sea, offshore Timor-Leste.

The program comprises three production wells (two platform and one subsea) and will develop additional natural gas and liquids reserves. This will extend field life and production from the offshore facilities and the Darwin LNG plant.

The sanction of the project comes less than seven months after Santos became operator of the Bayu-Undan Joint Venture following the completion of its acquisition of ConocoPhillips' northern Australia and Timor-Leste assets.

What's next?

The release explains that the wells will be drilled using the Noble Tom Prosser jack-up rig, with the first well scheduled to spud in the second quarter of 2021. After which, production from the first well is expected in the third quarter of 2021.

Santos' Managing Director and Chief Executive Officer, Kevin Gallagher, was very pleased with the news.

He said: "We are delighted to be able to pursue an opportunity that wasn't on the table 12 months ago, which will optimise field recovery, extend production and deliver significant value to both the BayuUndan Joint Venture and the people of Timor-Leste."

"This infill drilling program adds over 20 million barrels of oil equivalent gross reserves and production at a low of cost of supply and extends the life of Bayu-Undan, reducing the period that Darwin LNG is offline before the Barossa project comes on stream," he added.

What about the sell-down?

At present, Santos currently owns a 68.4% interest and operatorship in Bayu-Undan and Darwin LNG.

However, it is in the process of selling a 25% stake to SK E&S, which will reduce its interest to 43.4%.

Mr Gallagher commented: "Completion of the SK E&S sell-down is now well advanced with consent from BayuUndan/DLNG Joint Venture and Timor-Leste regulator received before Christmas last year and we are well progressed with Australian regulatory approvals. The sell-down will complete once the Final Investment Decision on Barossa is taken in 1H 2021."

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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