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Santos reports record free cash flow and underlying earnings, and higher final dividend

Full-year (US$m)20212020Change
Production (mmboe)92.189.03%
Sales volume (mmboe)104.2107.1-3%
Product sales revenue4,7133,38739%
EBITDAX [1]2,8051,89848%
Underlying profit [1]946287230%
Net profit/ (loss) after tax658(357)284%
Free cash flow [1]1,504740103%
Final dividend (UScps)8.55.070%

Santos today announced its full-year results for 2021, reporting record free cash flow of
US$1.5 billion and underlying profit of US$946 million. The results reflect significantly higher oil and LNG prices compared to the corresponding period due to the recovery in global energy demand combined with supply constraints across the industry due to lower capital investment through the pandemic, and three weeks contribution from the Oil Search assets.

The results also reflect Santos’ disciplined, low-cost operating model which delivered a free cash flow breakeven of US$21 per barrel in 2021.2

The reported net profit after tax of US$658 million includes losses on commodity hedging and costs associated with acquisitions and one-off tax adjustments, and is significantly higher than the corresponding period mainly due to impairments included in the previous year.

The Board has resolved to pay a final dividend of US8.5 cents per share, 70 per cent higher than the previous final dividend. The dividend equates to 20 per cent of full-year proforma free cash flow for the merged entity less dividends paid in the first half by both companies, in-line with Santos’ sustainable dividend policy which targets a range of 10 per cent to 30 per cent payout of free cash flow.

The final dividend is franked to 70 per cent and substantially distributes the company’s remaining franking credits to shareholders. Based on the company’s carry-forward tax losses, Santos does not expect to generate franking credits for the next several years.

Santos Managing Director and Chief Executive Officer Kevin Gallagher said Santos delivered record production, free cash flow and underlying earnings in 2021, as strong base business performance positioned the company to benefit from higher commodity prices.

“The highlight of the year was the completion of our merger with Oil Search. The merger delivers increased scale and capacity to drive our disciplined, low-cost operating model and unrivalled growth opportunities over the next decade – all with a vision of becoming a global leader in the energy transition,” Mr Gallagher said.

“The financial results we are announcing today include only three weeks of the merged company. Had the merger been in place for all of 2021, the combined asset portfolio would have generated more than US$2.3 billion in free cash flow for the year.

“We will now seek to further optimise the portfolio, reduce gearing and conduct a review of our capital management framework including returns to shareholders.

“2021 brought global energy security into the spotlight with higher prices and a supply crunch in the wake of rapidly recovering demand and a lack of investment in new supply.

“It is vitally important that investment in new supply occurs and in a sustainable way. At Santos, we are focussed on supplying critical fuels more sustainably to meet society’s demand.”

2022 Guidance

2022 production is expected to increase to a range of 100 to 110 million barrels of oil equivalent (mmboe) primarily due to higher production from PNG following the Oil Search merger. This is expected to be offset by a lower share of Bayu-Undan production, which is expected to be approximately 10 mmboe less than 2021, due to a lower average working interest following the 25 per cent sell-down to SK E&S in 2021, lower gross production as the field approaches end of field life and lower net entitlement under the Production Sharing Contract due to higher forecast LNG prices. Sales volumes in 2022 are expected to be in the range of 110 to 120 mmboe.

Sustaining capital expenditure is expected to be approximately US$900 million and restoration expenditure is expected to be approximately US$200 million. Sustaining and restoration expenditure is self-funded within the disciplined operating model and is included in the 2022 forecast free cash flow breakeven oil price of less than US$25 per barrel.

Major growth projects capital expenditure is expected to be in the range of US$1.15 billion to US$1.3 billion. A contingent amount of up to approximately US$400 million could be added should the Dorado and Pikka projects take final investment decisions. Guidance assumes current Santos interest in all projects.

At an average oil price of approximately US$65 per barrel in 2022, it is expected sufficient free cash flow would be generated to fund forecast major growth projects capital expenditure, including the contingent amount.3

2022 Annual General Meeting

The 2022 Annual General Meeting will be held on Tuesday 3 May 2022. The closing date for receipt of nominations from persons wishing to be considered for election as director is Thursday 24 February 2022.

Live webcast

A video presentation on the 2021 full-year results is available on Santos’ website. A live question and answer webcast for analysts and investors will be held today at 11:30 AEDT.

To access the live webcast, register on Santos’ website at www.santos.com.

[1] EBITDAX (earnings before interest, tax, depreciation, depletion, exploration, evaluation and impairment), underlying profit and free cash flow (operating cash flows less investing cash flows net of acquisitions and disposals and major growth capital expenditure, less lease liability payments) are non-IFRS measures that are presented to provide an understanding of the performance of Santos’ operations. Underlying profit excludes the impacts of costs associated with asset acquisitions, disposals and impairments, hedging as well as items that are subject to significant variability from one period to the next. The non-IFRS financial information is unaudited however the numbers have been extracted from the audited financial statements. A reconciliation between net profit after tax and underlying profit is provided in the Appendix of the 2021 full-year results presentation released to ASX on 16 February 2022.

[2]  Free cash flow breakeven is the average annual oil price at which cash flows from operating activities (before hedging) equals cash flows from investing activities. Excludes one-off restructuring and redundancy costs, cost associated with asset divestitures and acquisitions, major growth capital expenditure and lease liability payments.

[3]  Forecast free cash flow of approximately US$1.8 billion at an average oil price of US$65 per barrel based on sensitivity of approximately $450 million in free cash flow for each $10/bbl above forecast free cash flow breakeven of <$25/bbl in 2022. Excludes hedging. Free cash flow breakeven is the average annual oil price at which cash flows from operating activities (before hedging) equals cash flows from investing activities. Forecast methodology uses corporate assumptions. Excludes one-off restructuring and redundancy costs, costs associated with asset divestitures and acquisitions, major growth capital expenditure and lease liability payments.

Watch the 2021 full-year results video presentation