Santos targets $1.5B debt reduction in next three years

Australian oil and gas company Santos is targeting a $1.5 billion debt reduction over the next three years through cost cuts and assets sale as part of a new business strategy that the company revealed on Thursday. 

Speaking at the company’s Investor Day in Sydney, Santos Managing Director and Chief Executive Officer Kevin Gallagher said Santos will implement a three-phase strategy with steps that overlap and aim to “drive shareholder value.”

Santos first step in this new strategy is to stabilize the business by simplifying it and focusing on five core natural gas assets: Cooper Basin; GLNG; PNG; Northern Australia, and Western Australia Gas.

“These five core assets represent 95% of the value of Santos,” Gallagher said.

The remaining assets will be packaged and run separately for value as a standalone business.

The company’s next step is to build opportunities across higher margin conventional assets and maximize production across operated assets.

Finally, Santos said it will develop a focused exploration strategy and capability, and identify additional gas supply to drive long-term value from the five core, long-life natural gas assets.

The new strategy plans for a $1.5 billion reduction in net debt to less than $3 billion by the end of 2019 through increased operating cash flow and releasing capital through non-core asset and infrastructure sales.

Gallagher said progress had already been made in 2016 on the Santos turnaround.

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

“Capital expenditure and upstream unit production costs have been reduced by 53% and 17% 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.”

Santos’ 2016 sales volumes are expected to be at the top end of the 81-83 mmboe guidance range and upstream unit production costs below $9/boe (previous guidance range $9-9.50/boe). Further, 2016 production is expected to be in the top half of the 60-62 mmboe guidance range.

“Our turnaround strategy also brings significant oil price leverage, with operating cash flow forecast to increase by $300 million in 2017 for a $10 per barrel oil price move above $50 per barrel,” Gallagher said.

The company also said on Thursday it has appointed Bruce Clement as Vice President to run the new standalone low-cost business comprising all non-core assets. He will be based in Sydney.

Santos noted that Clement was previously Chief Executive Officer of another Australian oil and gas producer, AWE Limited, and that he will bring a “low-cost mindset” to the management of these assets.

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