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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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Did This Gas Major Just Ensure Its Survival?

Australia’s second largest independent gas producer, Santos Ltd., has posted a Q1 production record. The Adelaide-based company said production for the first quarter ending March 31 rose to a record 18.4 million barrels of oil equivalent (mmboe), up from 13.8 mmboe for the same quarter last year, a 33 percent increase. Revenue came in at $1.02 billion, the second-highest quarterly revenue on record, it said. However, revenue growth was slightly held back by lower oil and liquefied natural gas (LNG) prices, with domestic gas prices also more economical due to pricing adjustments on a contract booked in the previous quarter and cyclone-related shutdowns, Santos added. Santos reports its financials in U.S. dollars, not Australian dollars.

Santos’ impressive Q1 results, however, didn’t come from just more gas production but from the acquisition of an oil production company’s assets. Santos said its production was boosted by its $2.5 billion acquisition of Quadrant Energy assets last year, including an 80 percent stake in Quadrant’s Dorado oil find. The Dorado offshore discovery is one of the largest ever oil discoveries in Australia’s North Western Shelf, containing some 171 million barrels of oil.  "In the second quarter, we look forward to continued drilling success, including commencing appraisal of the ... Dorado oil discovery offshore Western Australia" said Santos chief executive Kevin Gallagher. According to Carnarvon Petroleum, Quadrant’s partner before the acquisition last year, oil fields of this scale are not often found, with the recent large field discovery on the North West Shelf being around 30 years ago.

Santos turn-around continues

Santos’ performance marks a steady turn-around from just a few years ago when the company was bloodied in the 2014-2016 roil in global oil and gas markets that saw oil prices plunge from over $100 per barrel in mid-2014 to breaching the low $30s price point in early 2016. At the same time, the company was also building its massive CAPEX intensive Gladstone LNG (GLNG) project in Queensland and increasing debt levels, resulting in a plunge in its stock on the Australian Stock Exchange (ASX) at the time, from a peak of AUS$13.24 to below AUS$3 per share in 2016. Related: The World’s Most Unorthodox Oil Nation

As a result of its low valuation, Santos became a target for a number of take-overs. However, early last year Santos, under new CEO Kevin Gallagher, fended off an aggressive takeover attempt by U.S. private equity firm Harbour Energy which had offered AUS $6.95 a share, valuing the company at AUS$14.45 billion at the time. Gallagher rejected the offer in favor of internal growth. After the Harbour Energy offer rejection, the price of Santos stock plummeted some 8.5 percent. However, strong oil prices and over performance at GLNG, as well as reliable predictions for its South Australian Cooper basin project, boosted the company’s share price again, pricing it above what most firms were willing to pay for its acquisition. In other words, the days of bottom fishing from hostile firms due to Santos’ low stock valuation had finally come to an end.

Going forward, Santos still needs to reduce debt levels, but the current spike in global oil prices will help the company continue its turn-around as will better management and a continued focus on internal growth. Oil prices for both global benchmarks, London-traded Brent Crude futures, and U.S.-oil benchmark West Texas Intermediate (WTI) crude have hit five-month highs amid a drying up of global oil supply from the OPEC+ production cut agreement put in place in January, as well as oil production curbs in Iran, and Venezuela due to U.S. sanctions, as well as oil production cuts in Libya as fighting persists around Tripoli. Shares for Santos stock have risen around 29 percent since the start of the year.

By Tim Daiss for Oilprice.com

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