Santos books $1.6 billion hit after asset writedown
Santos has been forced to slash more than $1.6 billion from the value of its assets following the recent plunge in oil prices.
The battered company, one of the worst affected by the oil price crash, said the after tax non-cash impairment charge, totalling nearly $2.4 billion before tax, would appear when it releases its 2014 full-year results later this month.
But Santos, which has seen its share price dive in recent months, has raised eyebrows after opting against writing down its part in a massive Gladstone LNG (GLNG) project which is not due for completion until later this year.
Last week, British based BG Group took a massive hit on its rival project – one of three located on Curtis Island just off the coast at Gladstone – when it slashed $8.87 billion from the value of its investment, sparking speculation that Santos and Origin would be forced to follow suit.
The vast bulk of BG's writedowns were related to lower revenue forecasts, and the global energy group, once a share market darling, since has decided to parachute in a new chief executive early in an effort to stem the losses.
However, Santos chief financial officer Andrew Seaton said that his company's project is on time and within budget, and his company also paid considerably less for its stake in 30 per cent GLNG than BG had for its project.
Therefore, he argued, it is unfair to compare BG's writedown with the value of GLNG on Santos's books.
"Companies like BG, who acquired their interests, have to consider those acquisition costs as part of their book value in their impairment analysis. On the publicly available information, in 2008 and 2009 BG paid about $US4.7 billion for their interests in Queensland, including the acquisitions of QGC and Pure Energy. This was before they developed their LNG project," he said in an analyst call.
"The difference with us is that we acquired Tipperary in 2005 for $US466 million. This bought us our interest in the Fairview CSG field, which underpins GLNG. Our other fields were largely captured through organic growth. We then sold down our interest in GLNG to 30 per cent, generating over $US3 billion cash in the process."
The commodity price crash, along with cost blowouts in construction on all three Gladstone-area projects, has caused a major reassessment of expansion plans within the energy sector.
A fortnight ago, Royal Dutch Shell shelved plans for a $20 billion LNG operation in Queensland, saying the greenfields project was now "off the table".
Santos has been the subject of intense speculation as to whether it could be forced to either raise new capital or sell assets, such as its pipeline to the plant.
Chief executive David Knox has assured investors in recent weeks that the company's credit rating was safe, that it was attacking costs and that it had enough cash on hand to complete the Gladstone LNG project. Standard & Poor's last week maintained its BBB credit rating, adding it was not at risk.
More than half of the impairment announced today related to exploration and potential production sites, dominated by work in the Gunnedah Basin in New South Wales along with assets in South Australia, Queensland, Western Australia, Bangladesh and Indonesia.
The main producing asset impacted by today's writedown is the Cooper Basin, on the border of Queensland and South Australia.
Impairments have also been announced for Mereenie in the Northern Territory, Carnarvon Basin in WA, and sites in Vietnam and Papua New Guinea.
Santos expects oil and gas prices will remain depressed until 2018.
Santos is estimating the key Brent oil price to remain around $US55 this year, rising to $US70 next year, $US80 in 2017 and then recovering to $US90 in 2018 and 2019.
It comes a week after Santos advised its workers that job cuts were on the way as the firm tries to cut costs to offset the lower oil price.
