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Production versus revenue
Third-quarter production for Santos of 13.4 million barrels of oil equivalent (Mmboe) was a touch soft on the side compared to the corresponding period last year. Year-to-date production remains behind 2012, with 37.9 Mmboe extracted so far versus 38.9 Mmboe this time last year, representing a 3% drop.
The biggest disappointment out of the announcement was that full-year production is likely to finish at the lower end of company guidance of 52 to 55 Mmboe, due to issues experienced in August; this is especially disappointing considering the Santos downgrade of production guidance in July.
Santos’ reasoning for this lower call is due to the deferred production from Chim Sáo (Vietnam) as the gas pipeline was shut down in August and the oil pipeline from the field was slowed to reduce flaring issues. Full operations are due back on line in December. The Fletcher Finucane in Canarvon had also experienced issues as Santos’ water separation faltered slightly, slowing oil production.
However, production is only one side of the story, as revenue streaks ahead. Third-quarter revenue reached a record, hitting $1.02 billion, up 29% on the corresponding period and 4% ahead of expectations. The average gas price of $5.98 per gigajoule was also a record and illustrates the demand for gas in the global market and how Santos registered these stellar revenue numbers.
The third-quarter revenue illustrates the kind of numbers STO could find at full operations. With STO still in a high capex stage, the next three years could be a very exciting time for the Adelaide-based company.
The capex that is being spent does look like it is being managed very cleverly. Gladstone is now 65% complete and is still on budget; Santos is holding firm on the first delivery date which will be some time in the second half of 2015 (even though some are forecasting it to begin in early 2015). This project is expected to be the biggest operation in Santos' portfolio and it’s probably underestimated by the market.
The PNG asset is even closer at over 90% complete, and is on time and on budget according to Friday's update. First production is expected to begin in early 2014.
This all bodes very well for a company with a continuing Asian-facing business where demand is skyrocketing. Once these two projects hit production phrase, coupled with rising gas prices, Santos is in for a very strong outlook and could become one of the biggest gas plays in the region.
Potential trade ideas
I see Santos as a long-term play, with the production report dip a medium-term buying opportunity. I also see the revenue line overriding the initial reaction to production, and expect the company to head back to the year-to-date high over the coming weeks, as risk trade picks up.