08/12/2016 - 09:43

WA assets in Santos spin-off

08/12/2016 - 09:43

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Four Western Australian projects will be included in a planned spin-off from energy player Santos in a bid to increase cash flow and cut debt, including facilities at Thevenard and Barrow islands.

WA assets in Santos spin-off
Kevin Gallagher says capital expenditure costs have been cut by 53 per cent.

Four Western Australian projects will be included in a planned spin-off from energy player Santos in a bid to increase cash flow and cut debt, including facilities at Thevenard and Barrow islands.

It comes a year after the company concluded a $2.5 billion capital raising, which followed a previous process where Santos had sought to offload assets.

In August, Santos declared a $US1.1 billion half-year loss and took a $US1.5 billion impairment on its Gladstone LNG plant.

The company’s 33.4 per cent share in oil fields Fletcher Finucane and Mutineer Exeter, which produce through the Modec Venture 2 floating processing storage and offloading vessel, will be included in the spin-off.

Barrow Island is home to WA’s first oil field and is now operated by Chevron, with Santos holding a 26 per cent stake.

That slice equates to 0.5 million barrels of oil annually.

Thevenard is understood to be under care and maintenance.

Other assets in the new entity will include those in the Gippsland Basin, Indonesia, Vietnam, Malaysia, Bangladesh and two onshore in other states.

The new company will be a standalone entity run from Sydney, led by vice-president Bruce Clement, who was formely chief executive of AWE.

It is unclear as to whether the new entity will be listed. 

Santos will retain its 45 per cent share of the Devil Creek and Varanus Island domestic gas plants, both of which are operated by Quadrant Energy.

Between them, they have a capacity of around 615 terajoules per day of natural gas, more than a third of capacity in the state.

The company projected a supply deficit emerging from the early 2020s, with about 70 per cent of the demand in the market to be recontracted between 2019 and 2024.

Further north, Santos will retain its 11.5 per cent ownership of Darwin LNG, which has a capacity of 4 million tonnes per annum.

The focus at the ConocoPhillips-operated Darwin will be on finding backfill opportunities, with a final investment decision on infill drilling at the Bayu Undan due in the first quarter of next year.

Santos chief executive Kevin Gallagher said the company would focus on five assets, the Cooper Basin, Gladstone LNG, Papua New Guinea, Northern Australia, and WA gas

“We have reduced the free cash flow breakeven oil price to US$39 per barrel, down from US$47 per barrel at the start of the year,” he said. 

“Capital expenditure and upstream unit production costs have been reduced by 53 per cent and 17 per cent respectively, headcount has been reduced by more than 500 positions, and the business has been free cash flow positive for each of the last seven months.

“Our turnaround strategy also brings significant oil price leverage, with operating cash flow forecast to increase by $US300 million in 2017 for a $US10 per barrel oil price move above $US50 per barrel.”

The company said 2016 sales volumes were expected to be at the top end of the 81 million to 83 million barrels of oil equivalent guidance range, and upstream unit production costs would be below previous guidance of $US9 per barrel of oil equivalent. Production for this year is expected to be in the top half of the 60-62 mmboe guidance range.

Shares in Santos had fallen 2.1 per cent to $4.27 each at the time of writing.

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