Santos shares rally as Q2 production rises 15%, revenue dips

We examine the highlights from Santos' second quarter production results.

Production up 15%, but lower oil prices drag revenues down

The Santos (STO) share price rallied at the open on Thursday, after the large-cap gas and oil producer released its second quarter (Q2) activities report to the market.

STO last traded at $5.63 per share (+3.11%).

Looking at the key figures from STO’s second quarter activities report, the energy giant revealed that Q2 production came in 15% higher, on a quarter-over-quarter basis, at 20.6 million barrels of oil equivalent. Overall and for the half ending 30 June, Santos has now produced an impressive 38.5 million barrels of oil equivalent.

The company said these robust production results were driven by higher gas production in Western Australia as well as 'continued strong onshore production and a higher equity interest in Bayu-Undan following completioon of the ConocoPhillips acquisition.'

Mind you, while production came in stronger during quarter, it failed to have a positive impact on overall revenue growth, with Santos reporting revenues of US$785 million, down 11%. This, said Santos’ management, was caused by lower oil prices, though it was partially offset by 'domestic gas and LNG sales revenues'

Average realised oil prices came in 50% lower during the quarter, at US30.78 per barrel compared to US$63.80 per barrel in the first quarter.

In March, when oil prices had begun to precipitously slip from their previous highs as a result of the Coronavirus induced supply-demand shock, Santos flagged that around 35% of its sales volumes would be derived from fixed-price contracts. Looking forward, the company noted that 'approximately 60% of production volumes for the remainder of 2020 are either fixed-price domestic gas contracts or oil hedged at an average floor price of US$38 per barrel.'

This strategy, as the gas and oil giant today noted, has helped cushion the impact of Covid-19. Overall, fiscal year-to-date, Santos has brought in revenues of US$1.7 billion, representing a still hefty decline of 17%, on a year-over-year basis.

Reflecting on the impact of Covid-19, the company's MD and CEO, Kevin Gallagher said:

'As COVID-19 and the lower oil price continue to challenges us, we have remained resilient and kept production going, meaning our revenues have continued to flow. Our balance sheet is strong and we remain well positioned to leverage growth opportunities when business conditions improve.'

Mind you, while the company’s top-line has taken a hit, from an operational perspective, Santos reassured investors that it was in a strong position – with US$1.3 billion of cash on hand and US1.9 billion of undrawn debt facilities.

STO said it was targeting a free cash flow break-even price of around US$25 per barrel in 2020.

Santos share price: updated production guidance

Looking forward, Santos today revised its 2020 production guidance upwards, from 81-89 million barrels of oil equivalent, to 83-88 million barrels of oil equivalent. By comparison, the upper-range of the company’s sales volumes guidance have been lowered – from 101-109 million barrels of oil equivalent to 101-107 million barrels of oil equivalent.

Santos made no changes to its 2020 capital expenditure guidance – which remains at US$900 million overall, comprised of US$750 million (base) and US$150 million (major growth) capital expenditures.

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