The company at the heart of national energy crisis, Santos, is taking the piss. Via Credit Suisse:
Solid quarter operationally Santos delivered a solid operational performance in 1Q17, with production of 14.8mmboe and sales of 18.6mmboe. Net debt was down US$380m, to US$3.1bn, although heavily helped by asset sales and the SPP. All guidance for FY17 was left unchanged. CY17 ~16% EPS changes reflect mostly oil price MarQ mark-to-market and minor production tweaks.
Still break-evening our hearts The number that will get the bulls excited, and without quantification trouble us, is that FY17 FCF breakeven has been guided to US$34/bbl. Genuine cost savings, being driven by sustainable opex/boe reductions, corporate cost reductions and lower F&D costs would all be positive. Failure to spend F or D costs, kicking maintenance down the road, drawing on storage and running assets into the ground is not a sustainable business. We remain concerned that remuneration targets risks incentivising this behaviour though. If one believed GLNG implicit F&D costs, that the Cooper is FCF positive sustainably at current prices and other opportunities existed then we would far rather a Santos that breaks even at US$60/bbl if US$26/bbl of that is going to value accretive options.
Roma still a mystery to us We note with interest the comments that Roma gas production is “ahead of expectations”. It is producing at 36TJ/d (up 22% vs 4Q16), but this from 322 connected wells. So we are averaging ~0.11TJ/d. From when we used to get disclosure on wells, 2 years ago to the day the investor presentation highlighted that 120 wells were connected. How long exactly are these wells dewatering for and if it takes this long (with only 7 Roma wells drilled in 1Q17) why on earth is an extra 140TJ/d of compression currently being built to take it up to ~290TJ/d? RUGS will eventually run dry, leaving plenty of idle existing capacity to grow into.
Risks relatively fairly balanced at present We continue to hope the focus for Santos shifts back to trying to deliver value accretive growth, rather than running a business that is repentant for the past. We already model for GLNG capex to be 2x guidance from 2020 onwards so capture some conservatism in our numbers. To this extent we feel relatively ambivalent to the stock at the current share price. Plenty could make us more cautious, a few brave decisions could make us more positive.
And recall this:
The Santos-led Gladstone LNG export plant is buying more than half its gas from third parties, rather than producing from its own coal seam gas fields, despite lifting its own production in the March quarter, Santos has revealed.
In its first quarter report, Santos said GLNG, in which Santos has a 30 per cent stake, produced only 43 per cent of the 1.4 million tonnes of LNG exported from Gladstone during the quarter from its own fields.
But, thanks to a boost in production from GLNG’s Queensland coal seam gas fields, this is more than in the December quarter, when GLNG provided just 38 per cent of its own gas.
It is the first time Santos has clearly broken out third-party gas volumes for GLNG, whose market purchases for export are in the spotlight as east coast gas markets tighten and prices rise.
In short, management is arbitraging the longer term future of both the firm and the nation as it pursues remuneration benefits by buying third party gas as it runs down its own assets. It’s not even economically sustainable as it triggers demand destruction over the long run, robbing the business of its customers.
And as these resources pirates strip cash out of every east coast household and business pocket we do nothing.