Santos Limited (STO) Earnings Call Transcript & Summary

Hello and thank you for joining me. Given the significant health and economic challenges that the world is facing today, I'd like to give this opportunity to provide you with an update on how we at Santos are responding to the COVID-19 pandemic and the oil price crash, and why, despite all of these challenges, I'm optimistic about the future for Santos. Back in 2016, when we rolled out our new strategy at that time, central to that strategy was the implementation of a low-cost disciplined operating model. And since then, we have demonstrated year-on-year how we've been able to reduce costs across our operations and set Santos up for just this type of event so that we can run a sustainable free cash flow-positive business through the cycle year-after-year. So in response to the COVID-19 pandemic and in order to ensure that we can continue to provide reliable, consistent production performance across all of our core assets, Santos has put in place a number of protocols, procedures and guidelines to ensure that we can continue to operate reliably through this very difficult period. These include social distancing practices, both at our offices and, very importantly, across all of our field operations. They include things like temperature monitoring when people arrive at the work sites each day, temperature monitoring at the airports before we fly off to our sites, limiting only essential personnel to travel to the field during this period. We have also implemented increased hygiene standards across all of our operations, both in the offices and, again, in the field, whilst flexible working policies have allowed us to allow many of our people to work from home, again limiting the risk, if you like, of infection across all of our sites. In addition to the health and safety protocols and procedures that were put in place, Santos also announced in early March some radical financial steps to ensure that the company stays strong through this period, with significant CapEx cuts in the order of USD 550 million for 2020. That's approximately 38% of our planned CapEx for the year, and very importantly, that -- those CapEx cuts will not impact our 2020 or 2021 production volumes. We have maintained our sustaining capital, and we've maintained our spend on critical maintenance and integrity activities to ensure, again, that we have reliable production. We also announced $50 million OpEx reduction across our operations. And that together has resulted in a free cash flow breakeven target for 2020 of around USD 25 per barrel. Santos is a very different company from the company back in 2016, the last time we faced a downturn in our sector. This is demonstrated by the fact that we have more than USD 3 billion in liquidity, with around $1.15 billion in cash on the balance sheet as well as around $1.9 billion in undrawn debt facilities. We also have around 70% of our production revenue for the remainder of 2020 fixed price, with around 35% of our sales volumes comprising of fixed price CPI-linked domestic gas contracts and a significant oil price hedge with a floor of USD 39. I was glad to see recently that S&P reaffirmed our credit rating with a stable outlook. And with no near-term debt maturities due for a few years, I'm also pleased to say that, today, Santos can -- has significant headroom on our debt covenants at current oil prices and, indeed, at lower oil prices for a number of years ahead. So today, we're a far more resilient and strong company. With a free cash flow breakeven around USD 25, we're well set up to come through this very difficult period and emerge stronger on the other side. So in addition to a strong balance sheet and the very effective contingency measures we've put in place to deal with the current risks around the pandemic, I was very pleased with our first quarter results, which had highlights such as delivering USD 265 million in free cash flow and very strong production performance across our core assets, with particular highlights being a very high production rate, the highest production we've seen in the Cooper Basin in 9 years with an annualized production rate of around 17.5 million barrels of oil equivalent. And also another highlight was GLNG sales performance with an annualized run rate of around 6.4 million tonnes per annum, exceeding our target for 2020. In addition to that, we're pleased to say that we've been able to maintain our drilling activities onshore, retaining all of our rigs and continuing to drill the wells that we planned at the start of the year despite the challenges with the low oil price and the pandemic. And that should help us maintain our production levels in our onshore assets throughout this period and, indeed, continue to deliver relatively flat performance for the next 4 or 5 years without any new growth projects being added across our portfolio. And that should help Santos not only be resilient to the current challenges but position us for growth when we get on the other side of this downturn. And we have very exciting growth projects that we look forward to bringing back to the market at the right time, growth projects like the very exciting oil project offshore Western Australia, Dorado; and of course, the Barossa project offshore Northern Australia, which will provide backfill for Darwin LNG; and onshore, here on the East Coast of Australia, the Narrabri Gas Project, should we be successful in getting that approved over the next few months. So all in all, I'm pleased today that Santos is showing its resilience, with our disciplined low-cost operating model setting us up perfectly to come through this very challenging time and be in a strong position at the end of this to then look forward to more growth. Thank you.