Santos today outlined how its new strategy had transformed the company into a business that generates significant free cash flow in the current oil price environment.
Speaking at the company’s Investor Day in Sydney, Santos Managing Director and Chief Executive Officer Kevin Gallagher said the excellent progress on the Transform-Build-Grow strategy presented to the market in 2016 had exceeded his expectations.
Mr Gallagher said since the beginning of 2016, the Transform phase of our strategy has already delivered:
“We have simplified the business to focus on five core, long-life natural gas assets: Cooper Basin, Queensland (including GLNG), PNG, Northern Australia and Western Australia Gas. This core portfolio is positioned to provide stable base production for the next decade and positive free cash flow in an oil price range of US$35-40/bbl, pre-major growth opportunities.
“We have removed substantial cost, arrested the production decline in the Cooper, GLNG is ramping-up and PNG LNG is operating at record rates.
“We have embedded a disciplined operating model and established clear guidelines for portfolio management and priorities for uses of cash,” Mr Gallagher said.
Addressing the Build and Grow phases of the strategy, Mr Gallagher also announced today:
(1) Free cash flow breakeven is the average annual oil price at which cash flows from operating activities (including hedging) in 2017 equal cash flows from investing activities. Forecast methodology uses corporate assumptions. Excludes one-off restructuring and redundancy costs, and asset divestitures and acquisitions.
(2) PPLs 395, 464, 487, 507 and 545. Farm-ins subject to Government approval.
“Our primary objective is to safely deliver production and reserves growth across the core assets, and discover new resources to grow the business, all within the constraints of our disciplined operating model,” Mr Gallagher said.
2017 production and sales volumes are expected to be towards the upper end of the 58-60 mmboe and 79-82 mmboe guidance ranges, respectively. All other guidance for 2017 is maintained, including capital expenditure of US$700-750 million.
In 2018, Santos will increase drilling activity in both the Cooper Basin and GLNG to grow production and increase gas supply for the domestic market. The company also plans to invest in the Angore surface facilities and tie-in to Hides, Muruk appraisal and exploration drilling in PNG, and FEED on the Barossa project in Northern Australia.
Capital expenditure in 2018 is expected to be in the range of US$825-875 million. Notwithstanding the increase in capex compared to 2017, the company expects to maintain a free cash flow breakeven in 2018 within the US$35-40/bbl target range.
All five core assets are expected to deliver higher production in 2018, including allowing for major planned plant shutdowns at PNG LNG, Darwin LNG and Moomba. Higher production from the core assets is expected to be offset by natural field decline in the non-core assets. Production guidance for 2018 is 55-60 mmboe. Excluding the major plant shutdowns, upstream unit production costs are expected to be broadly in-line with 2017 levels. Including the major shutdowns, guidance for 2018 is US$8.20-8.80/boe.
Sales volumes in 2018 are expected to be in the range of 72-78 mmboe, primarily due to lower forecast third party gas sales volumes and lower non-core asset volumes.
A live webcast of the Investor Day will be available on Santos’ website at www.santos.com from 9am AEDT today.