The Santos Ltd’s [ASX:STO] share price fell on STO’s half-year results despite posting a sales volume half-year record of 53.8 million barrels of oil.
STO shares are currently down 2%, trading at $6.08 a share.
Santos shares have only gained 6.25% over the last 12 months, underperforming the ASX 200 benchmark as the pandemic continues to affect energy market demand fundamentals.
Today, we will dive deeper into the half-year report and dissect the possible reasons behind key numbers.
STO’s record half-yearly production volume
Let’s shed some light on key financials and better understand the current financial position of the company.
Firstly, sales volume jumped 15% to a half-year record of 53.8 million barrels of oil equivalent (mmboe).
The hike in volume was linked to the higher average equity interest in Bayu-Undan (a facility located within the Timor-Leste offshore waters) and increased gas nominations in Western Australia.
Product sales were up 22% compared to the previous first half due to significantly higher volumes of Liquified Natural Gas (LNG), along with higher realised pricing on oil, naphtha, gas and ethane.
Source: Company presentation
However, this number was partially offset by lower realised pricing on LNG.
In the end, production volume rose 23% to a record volume of 47.3 mmboe in the first half.
Another reason behind production ramping up was the higher interest in Bayu-Undan from May 2020 combined with stronger gas production in Western Australia.
Now, let’s switch our attention to how the production volume translated to STO’s finances.
Santos boosts EBIT 320%
Santos posted a net profit in the first half is standing at $354 million, compared with a $289 million net loss during half-year 2020.
This represents a $643 million increase in net profit.
Santos said this was driven ‘predominantly’ through the lower after-tax impairment loss of $6 million, compared to a substantially larger loss of $526 million posted in 2020.
The company also attributed the net profit bump to higher realised oil prices as well as the rising sales volumes.
For instance, the company reported that the average realised oil price went up 45% to $69.57/bbl.
That said, average realised LNG price dropped 21% in the half to $6.74/mmBtu.
We should also note that if the gain from a drastically reduced impairment loss in not factored in, the earnings growth in H121 is a more modest 24%.
STO’s EBITDAX (earnings before interest, tax, depreciation, depletion, exploration, evaluation and impairment) rose from $995 million in H120 to $1,231 million in H121.
Net cash inflow from operating activities was 12% higher and stood at $942 million, while the net cash used in investing activities decreased by 70% to $334 million.
Lastly, cash flows generated from financing activities fell 4% to $479 million.
The primary reason was the drawdown of borrowings from the new US$1 billion 10-year 144A/Reg-S bond issue.
STO raises interim dividend
Finally, the Santos Board decided to pay an interim dividend of 5.5 US cents per share fully-franked.
This represents a 162% increase on the previous interim dividend.
Santos Managing Director and Chief Executive Officer Kevin Gallagher shared his views regarding the results:
‘These results again demonstrate the resilience of our cash-generative base business and strong operational performance across our diversified asset portfolio.
‘Consistent application of our low-cost disciplined operating model continues to deliver cost reductions and efficiencies despite cost challenges across the industry and COVID-related cost impacts in the base business.
‘We will remain disciplined and cost focused as we enter our next phase of growth and progress the proposed merger with Oil Search.’
Santos share price outlook
Santos retained its production guidance for the full year of between 87 million and 91 million barrels of oil equivalent.
Source: Company presentation
The company also upheld guidance of 100–105 mmoe of sales volume.
Now, the Santos share price has been under pressure lately, with the STO stock down 13% in the last month.
This comes after as oil prices slipped during the start of August.
Sources told Reuters than OPEC and allies believe the markets ‘do not need more oil than they plan to release in the coming months.’
STO’s recent slump also follows news that crude oil processing in China fell in July to its lowest level on a daily basis since May 2020.
All this led the IEA last week to say that demand for crude oil is expected to increase at a slower rate over the rest of the year because of the global surge of COVID-19 infections from the Delta variant.
The question is, could today’s half-year results inspire the market’s reassessment?
JPMorgan Analyst Mark Busuttil thought it was ‘hard to find fault’ with today’s results from Santos.
And RBC Capital Markets Analyst Gordon Ramsay concurred, saying the results were a ‘beat across the board’ compared to his forecasts.
Whatever one’s opinion on STO’s outlook, the company did manage to raise its interim dividend.
And the company reporting a net profit this half may give the market hope Santos is on track to distribute more in the future.
Since we are talking about dividends, I recommend reading our Editorial Director Greg Canavan’s free 2021 dividend report that analyses five stocks that could boost income in 2021 and beyond.
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