The measures include:
- US$550 million (38%) reduction in 2020 CAPEX.
- US$50 million reduction in 2020 cash production costs.
- A target 2020 free cash flow breakeven oil price of US$25/bbl.
In the first two months of 2020, Santos generated US$186 million in free cash flow.
Fixed-price gas sales contracts are expected to account for approximately 35% of sales volumes in 2020, including the commencement of a new 12-year domestic gas contract in Western Australia for an initial supply of 120 TJ/d from mid-year at favourable fixed price US$-denominated pricing.
In addition to these fixed price sales volumes, Santos has 6.2 million bbl of oil production hedged in 2020 at a floor price of US$54/bbl.
Forecast CAPEX in the base business in 2020 has been reduced by US$200 million whilst maintaining production and safe operations. Discretionary expenditure and exploration programmes have been deferred where appropriate. The reductions in expenditure in the base business are not expected to impact 2020 production guidance.
Forecast major growth CAPEX has been reduced by US$350 million, reflecting re-phasing in expenditure for the Barossa and PNG LNG expansion projects.
Free cash flow generation in the first two months of 2020 was US$186 million, resulting in cash on hand of US$1.2 billion at the end of February.
Net debt was US$3.1 billion, including approximately US$400 million in AASB16 lease liabilities.
Santos has liquidity of US$3.1 billion, comprising US$1.2 billion in cash and US$1.9 billion in committed undrawn debt facilities with maturities predominantly ranging from two to five years.
Near-term drawn debt maturities are minimal with US$60 million in corporate debt maturing in 2020 and US$62 million in 2021 (excluding PNG LNG non-recourse project finance which is funded from project cash flows).
The ConocoPhillips acquisition is expected to complete in the first half of 2020, subject to third-party consents and regulatory approvals, and deliver Santos operatorship and control of a high quality portfolio of low-cost, long-life assets and strategic infrastructure. Santos’ interest in Bayu-Undan and Darwin LNG will increase to 68.4% at completion and provide a significant boost to production and cash flows.
Santos will also benefit from the cash flows generated from the acquired business from the effective date of 1 January 2019 to completion with customary adjustments. The remaining net funding requirement for the acquisition before any sell-down of interests in the acquired assets is expected to be approximately US$800 million and is fully funded from Santos’ current cash of US$1.2 billion and US$750 million in committed two-year acquisition debt.
Santos has already announced a conditional agreement to sell 25% interests in Bayu-Undan and Darwin LNG to SK E&S for US$390 million and is in advanced discussions with a number of parties for equity in Barossa.
With the cost reductions and deferral of growth projects announced today, gearing is expected to be approximately 35% at completion of the ConocoPhillips acquisition and reduce by year-end based on the current oil price environment and including a dividend based on the free cash flow policy.
Including the ConocoPhillips acquisition and deferral of major growth projects, Santos’ debt covenants have sufficient headroom and are not under threat at current oil prices for a number of years.
Kevin Gallagher said: “The initiatives announced today demonstrate we are taking decisive action to ensure Santos is well-positioned in a lower oil price environment.”
“Whilst the current oil price dynamic is challenging, the eventual recovery will create opportunities for companies positioned to act on them. Our strategy to leverage existing assets and infrastructure remains unchanged and we expect to pursue these exciting opportunities when conditions permit.”
“However, given the uncertain economic impact of Covid-19 combined with the lower oil price, we expect to defer FID on Barossa until business conditions improve. Barossa remains an important project for Santos due to its brownfield nature and its low cost of supply.”
“The current environment is a time for discipline. In the short term, we will remain focused on the health and safety of our people and delivering our production target for 2020, whilst not compromising on safety or asset integrity.”
“Santos today is in control of our capital expenditure profile. All our major capital projects are yet to take final investment decisions, providing flexibility in commitment timing and our production levels from our current assets are relatively steady for the next four or five years without any new growth projects,” Gallagher said.
Read the article online at: https://www.oilfieldtechnology.com/drilling-and-production/23032020/santos-cuts-2020-capex-by-38/