Santos Limited (STO) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Santos 2022 Half Year results webcast. [Operator Instructions] I would now like to hand the conference over to Mr. Kevin Gallagher, Managing Director and Chief Executive Officer. Please go ahead.

Thank you. Hello, and welcome to this presentation of Santos's 2022 Half Year Results. I'd like to start by acknowledging the traditional lands of the Kaurna people of the Adelaide Plains from where I am speaking today. I pay my respect to their elders past, present and emerging. I also acknowledge the traditional owners and indigenous people of all the areas where Santos operates, including in Papua New Guinea, Timor-Leste and Alaska. I'm pleased to present yet another strong set of financial results that demonstrate the strength of our disciplined low-cost operating model. They are record results, the highest first half revenue, free cash flow and underlying profit in Santos' history. Importantly, they are driven by higher commodity prices and strong customer demand for our products. Before I discuss the results, I want to make a few observations regarding global energy markets. The ongoing war in Ukraine and instability in other regions is deeply troubling on many levels. It is impacting the global economy, driving inflation, disrupting markets and causing volatility in commodity prices. There has been a significant shift in global energy policy towards energy security as a key priority. We are seeing these issues play out in the Asian LNG market as supplies are drawn away from Asia into Europe and fears of shortages flow through to higher prices. These issues are creating structural changes to the global energy markets, which will be with us for some time. These changes are shaping our corporate strategy and the allocation of capital to prioritize shareholder returns and disciplined development along with the need to maintain a diversified and balanced portfolio of assets. We have strengthened our resolve for Santos to be a low-cost, high-performance business throughout the cycle, and they become a global leader in the transition to cleaner energy and clean fuels that are both affordable and sustainable. I will now provide an overview of the half year financial results for 2022 before handing over to Chief Financial Officer, Anthea McKinnell to discuss them in more detail. This is the first financial period since the merger of Santos and Oil Search. The results demonstrate the financial strength of the combination and the benefits of creating a new Santos with strong diversified cash flows and capacity to provide sustainable shareholder returns and fund new developments and the transition to a lower carbon future. Before we start, I draw your attention to the usual disclaimer. The financial results for the first half were outstanding. We set new records for sales revenue, free cash flow and underlying profit. Strong operational and cost performance combined with higher prices delivered $1.7 billion of free cash flow, up 199% and underlying profit of $1.3 billion, up 300%. We intend to return $605 million to shareholders, comprising a 38% increase in the interim dividend to USD 0.076 per share, unfranked and an increase in the on-market buyback from $250 million to $350 million. Our journey to become Australia's safest operator continues. Always safe is a core value at Santos. Our expectation is that every day, everyone who works at Santos is focused on keeping themselves and their workmates safe and going home healthy. I was pleased to see our personal safety performance improved in the first half and a continuation of the recent downward trajectory of loss of containment incidents. Importantly, these health, safety and environmental results have continued to improve as the number of assets in the business has grown. I remain focused on ensuring that we learn from these events and drive for ever safer workplaces and fewer safety incidents. Likewise, we are committed to continue the improvements we have made in recent years in process safety performance focused on driving incidents down. It's been a busy first half for all of us at Santos as we execute our strategy and seek to deliver long-term value for shareholders. The portfolio optimization process announced in February is nearing completion. We have sold 12.5% of Barossa to JERA for $327 million. And we are in advanced discussions with shortlisted parties for the sale of 5% of PNG LNG with expected proceeds in line with market consistent valuation. The asset is performing well in the current environment, and not surprisingly, there's been strong interest from reputable counterparties for equity in this project. Accordingly, we have decided to only sell 5% of PNG LNG. This would leave us with a 37.5% stake. Today, we have announced a final investment decision to proceed with Phase 1 of the Pikka oil project in Alaska. Pikka is an outstanding project that is ready for development now. We have a strong team and contracts in place to underpin the development costs. Phase 1 of the project is expected to produce 80,000 barrels of oil per day. First oil is anticipated in 2026. The project has strong economics, is located in a world-class oil producing province with significant existing infrastructure, has low emissions intensity and strong support from the Alaskan government, indigenous and local communities. Importantly, it is in a jurisdiction with low sovereign risk, an internationally competitive investment environment and a workable regulatory regime that ensures world-class safety and environmental protection. It also provides an opportunity for Santos to further diversify its portfolio to include oil production outside our key operations in Australia, PNG and Timor-Leste and reduce concentration risk. Santos is our mission reduction plans to achieve Net 0 Scope 1 and 2 emissions by 2040. And in line with that commitment, we intend to develop Pikka as a Net 0 Scope 1 and 2 project from first production and have entered into memorandums of understanding with Alaska native corporations to deliver carbon offset projects. Alaska also gives Santos access to potential carbon capture and storage developments that are strongly supported by the Alaskan and U.S. federal governments. Although we have been unable to agree on equity sell down to date with strong supply contracts and the project in an excellent state of readiness, we feel now is the time to monetize this exciting opportunity and are happy to move it forward. Like Barossa, we may yet sell down before first production. We do not need to wait and delay our investment decision and risk a loss in value for Santos shareholders. We have continued to deliver project and cost discipline throughout the first half of 2022. The Barossa and Moomba CCS projects are progressing on schedule and budget. Barossa was 43% completes at the end of July, and Moomba CCS was 20% complete. Consistent with that being experienced across industry, we are seeing some supply chain and cost pressures, but these are being managed within the project contingencies. We have announced reductions in our unit cost and CapEx guidance for this year as we continue to focus on safe, efficient and low-cost operations. The merger integration process is progressing well with $106 million in sustaining annual synergies delivered to date. This enables us to lift guidance to $110 million to $125 million in annual synergies. Finally, following the Board's approval of new capital management framework earlier in the year, we are now in a position to deliver higher returns for shareholders through an increase in the interim dividend and on-market share buyback. The strong first half results enabled the Board to increase returns, consistent with the company's new capital management framework. Santos intends to return $605 million to shareholders, equivalent to USD 0.18 per share from the interim dividend and on-market buyback. This slide shows a forecast of sources and uses of cash to 2030. I think the chart clearly demonstrates the scale of the diversified portfolio of cash-generative assets we have built at Santos. At a range of $65 to $100 long-term oil prices, Santos would expect to generate between $23 billion and $34 billion in free cash flow in this period. The strong cash flows from today's business are further strengthened from the low-cost LNG production at Barossa from 2025 and oil production at Alaska from 2026. This free cash would more than fund our committed project CapEx of about $7 billion. Between $16 billion and $27 billion of free cash would then be available for additional shareholder returns and to drive shareholder value through the investment of capital into development and the energy transition projects that meet our disciplined capital allocation criteria. I have already mentioned that Santos and our partner, Repsol, have decided to proceed with the Pikka Phase 1 oil project in Alaska. Alaska has a rich and proud oil and gas history, skilled workforce, strong contractors and suppliers and a very supportive regulatory regime. Taking FID on Phase 1 is consistent with our strategy of phased and disciplined development utilizing existing infrastructure. Phase 1 will execute a responsible development plan with a small surface footprint and utilize existing infrastructure, including the Kuparuk transportation pipeline and the Trans-Alaska pipeline. Indeed, the development approach for Pikka is not dissimilar to our upstream hub development approach in Queensland on our GLNG project. We are committed to delivering a net 0 project for equity share scope 1 and 2 emissions and have signed MOUs with Alaska native corporations to deliver high-quality carbon offset projects. Low carbon oil projects like Pikka Phase 1 are critical for global and United States energy security. We believe that this is the right project at the right time. Strong investment metrics under [ PANfID ] including a forecast IRR of about 19% at less than $60 long-term oil price, and the life cycle breakeven oil price of around $40 per barrel, including carbon pricing. The strength of the merged company is best demonstrated by the fact that our share of Phase 1 CapEx of $1.3 billion over 4 years would represent about 4.5 months free cash flow at average first half 2022 commodity prices. In relation to Dorado and following the exploration success at Pavo earlier this year, we remain disciplined in our approach and intend to undertake further work to fully appraise and optimize the development concept, integrating oil and gas production. The current inflationary cost environment, combined with regulatory and supply chain uncertainty, provide additional risk and therefore, do not support a final investment decision at this time. This means FID will be later than originally planned. But as I said, we will be disciplined to ensure that the right project is executed at the right time. This is consistent with our disciplined and phased approach to investing in major projects. And at Narrabri, we continue with planning for resource appraisal. We are also focused on obtaining relevant pipeline licenses for the project. We have had significant interest from new South Wales customers looking to sign long-term offtake agreements. Narrabri is a very strong project that can supply affordable gas to New South Wales customers. However, in line with our disciplined approach, we will not commit any significant capital until all approvals are secured. Following our merger with Oil Search, Santos is now a global low-cost producer of oil and gas committed to ever cleaner energy and fuels production with operations across Australia, Papua New Guinea, Timor-Leste and North America. This slide sets out our investment proposition to deliver long-term value to shareholders. We are a top-10 global independent with a balanced and diversified portfolio of long-life assets related to gas and LNG. With 8 million tonnes per annum of equity LNG capacity, we're a leading global independent supplier increasingly leveraged to strong demand for LNG, particularly in Asia. Our climate transition action plan launched in March sets out our plans to decarbonize our base business and achieve net 0 Scope 1 and 2 emissions by 2040 through investing in operational efficiency, deploying renewables, carbon capture and storage, carbon solutions and clean fuels. It is the very strong cash flows from PNG, Barossa and Alaska that will help fund our transition action plan projects in the second half of this decade and beyond. Our capital management framework provides investor participation in oil and LNG price upside as demonstrated today with $605 million in returns to shareholders. I am confident this is a unique investment proposition that will deliver long-term value and build on the same strategy and operating model we have consistently implemented since 2016. It is a successful strategy that has delivered almost $7 billion in free cash flow over the past 6.5 years. Let me finish with some further comments on energy security, the role of gas, decarbonization and market demand for LNG. As mentioned earlier, Russia's invasion of Ukraine brought global energy security into the spotlight, particularly for natural gas with higher prices and a supply crunch in the wake of rapidly recovering demand. Global energy demand already returned to pre covered levels last year, underinvestment in gas supply saw a 9% increase in coal-fired electricity to a global all-time high. The increase in global emissions from coal in 2021 was equivalent to all the emissions reduction achieved in the U.S.A. from the integration of renewables over the past 15 years. On the East Coast of Australia, we recently saw unplanned outages at coal-fired power stations, leading to a period of extreme gas demand and higher spot prices. Santos responded by diverting gas from GLNG and adding a fifth drilling rig in the Cooper Basin and facilitating time and location swaps with other producers to get gas in the right place at the right time. Gas remains a critical fuel for an orderly energy transition, but we must invest in new supply. Indeed, for any chance of an orderly transition where people can still have access to affordable energy, there is a need for more gas supply, not less. However, it is vitally important that investment in new supply occurs in a sustainable way. At Santos, we are focused on supplying critical fuels more sustainably to meet society's demand. Driving investment in new supply to less transparent producers or producing nations will not reduce global emissions or advance the transition; to Net Zero. LNG demand is at record levels with underinvestment driving significant price increases as we have seen in Europe and limiting access to energy for those who can least afford it. In the Asia Pacific, LNG demand is expected to double by 2040, according to this forecast from Wood Mackenzie. As a leading global independent LNG supplier, Santos is well positioned to benefit from this increasing demand with our 8 million tons of equity share LNG capacity. With the Japanese and Korean partners, we are investing significant capital in bringing new supply to market through Darwin LNG from Barossa, but we need stable regulatory and fiscal regimes to enable this and any future investments in Australia. The ADGSM process continues to be very concerning for our neighbors in Asia, who are also the investors and customers that have underpinned Australian resource development for 60 years and rely on us for their own energy and in turn, social and economic security. They are also, in many cases, friends and allies who are crucial to long-term stability in our region. Decarbonizing natural gas supports the long-term supply of reliable and affordable energy as well as the production of clean fuels, including hydrogen and ammonia. As the Head of the International Energy Agency has said reaching net 0 goals without CCS will be almost impossible. We have seen the recent inflation reduction Act bill passed in the U.S. Senate includes significant incentives supporting carbon capture and storage as well as direct air capture technologies, recognizing the critical need for the development and deployment of these to be able to achieve a net 0 future. We are seeing global momentum behind CCS with more than 27 projects across the world in countries such as Canada, the U.S.A. and Norway storing around 48 million tonnes per annum. We are developing a 3-hub CCS and clean fuel strategy across our operating footprint in Australia and Timor-Leste. Our Moomba CCS project, which will be one of the biggest in the world, paves the way for a significant carbon reduction and storage story for Santos and for Australia. We also look forward to commencing trials of direct air capture technologies in the Cooper Basin next year. These technologies could, if successful, leverage our significant infrastructure, CO2 storage capacity and Moomba CCS project to build a new carbon reduction business for Santos that also helps other industries decarbonize as well as provide significant Scope 3 reduction opportunities. In summary, it was a great first half. The business is running well, and we have created a global energy company of size and scale. With size and scale comes the opportunity to deliver stronger returns to shareholders and progress our aspiration to become a clean fuels company and reaching our net 0 commitment by 2040. I'll now hand over to Anthea to provide a detailed review of our financial results.

Thanks, Kevin, and hello to everybody. Santos has delivered record financial results, driven primarily by our increased recent interest in Papua New Guinea and higher commodity prices. I'll go through these items in more detail over the next slides. These are strong results, highlighted by record first half free cash flow of $1.7 billion, up almost 200% and underlying profit of $1.3 billion, up 300%. Consistent with our capital management framework, we've increased returns to shareholders through a combination of the sustainable base dividend and additional returns via share buybacks. Santos' balance sheet continues to strengthen with net debt reduced by $1 billion in the past 6 months and gearing reduced to 22.5%, positioning the company to fund future activities, including the energy transition. Refinancing of our 2024 and 2026 debt facilities has substantially progressed and will result in no significant near-term debt maturities until 2027, excluding the PNG LNG nonrecourse finance, which is funded from project cash flows. We've been very well supported by a banking group in this refinance and the facility was oversubscribed. The strength of our balanced and diversified portfolio has delivered record financial results for the first half. Operating cash flows increased by 127%, driven by increased volumes and higher commodity prices. The chart on the right shows free cash flow, which has increased almost 200% compared to the first half of 2021. The trend in earnings metrics is a similar story to cash flow, a diversified portfolio of 5 core assets, comprising strong LNG contracts, liquids and fixed price domestic gas contracts underpin a record first half EBITDAX of $2.7 billion and record underlying first half profit of $1.3 billion. This table shows a snapshot of the half year results, outlining the strength across our 5 core assets and their contributions to EBITDAX and margins. It highlights our diversified and balanced portfolio of core assets with strong margins, which increased to over 70% for the first half across our 5 core segments. Unit production costs increased slightly to $8.16 per barrel of oil equivalent, primarily due to lower volumes at Bayu-Undan and expected late life natural field decline. We expect Bayu-Undan will reach end of field life later this year. Excluding Bayu-Undan, costs were $7.08 per barrel. Unit costs were driven largely by reduced volumes in both the Cooper Basin due to planned maintenance and weather effects and Western Australia, largely due to customer outages. We also have an increased proportion of higher unit cost volumes in Papua New Guinea following the merger with Oil Search. We continue to seek efficiencies in cost savings to offset cost and supply chain [indiscernible]we're seeing and maintaining 2022 guidance at $7.90 to $8.30 per barrel of oil equivalent for the full year. Turning to CapEx. 2022 guidance for the base business is unchanged at $1.1 billion, comprising $900 million for sustaining and $200 million for restoration costs. Importantly, in 2022, this spend is self-funded from within the disciplined operating model. 2022 major project CapEx guidance has reduced to approximately $1.5 billion and includes Pikka Phase 1 now that this project has been sanctioned. Over the 4 years for the Pikka project, CapEx is estimated at $2.6 billion gross and $1.3 billion at Santos' working interest of 51%. CapEx guidance also reflects our decision to undertake further appraisal drilling at Pavo, which means the FID decision on Dorado will be later than previously planned. In April 2020, we released our new capital management framework. Santos' strategy is to maintain a disciplined low-cost operating model that is designed to deliver strong cash flows to the oil price cycle. Consistent with the operating model over the longer term, we're targeting a free cash flow breakeven oil price of less than $35 a barrel. This includes activities to sustain production at our 5 core asset hub and undertake planned restoration work. The free cash flow generated above sustaining capital requirements is available to maintain the balance sheet, deliver sustainable returns to shareholders via the base dividend plus additional returns when the oil price is above $65 per barrel, invest in major projects and importantly, invest in the energy transition. The chart represents the breakdown of returns to shareholders for the first half with a visual representation of the calculation methodology. The framework comprises two elements: a sustainable base dividend; and an additional shareholder return in the form of on-market share buyback. The current starting point is the free cash flow breakeven price for 2022, which is currently forecast at around $25 per barrel. Actual free cash flow generated above this starting point in the first half with $1.7 billion. The base dividend policy targets payout of 10% to 30% of free cash flow excluding major growth, up to $65 a barrel at average dated Brent. Based on $855 million of free cash flow available, the Board declared an interim dividend of USD 0.076 per share, reflecting a payout at the top end of the range. Additional returns to shareholders of at least 40% of the incremental free cash flow excluding major growth, apply when the average dated Brent price is above $65 a barrel. Dated Brent averaged $105 for the period. Based on $853 million of free cash flow available, the Board has increased the previously share buyback of $250 million by $100 million to a total of $350 million, and this reflects a 41% payout. For the first half of 2022, total return to shareholders was $605 million, when combining the interim dividend and additional returns through share buybacks. This comprises about 35% of free cash flow for the period and is a significant increase compared to the first half of 2021. This reflects our commitment to delivering increased returns to our shareholders, particularly during periods of higher oil prices. Refinancing activities have been undertaken to optimize the drawn debt maturity profile, by refinancing $1 billion in drawn and $200 million in revolving lines due 2024 and 2026 with fully revolving facilities due in 2025 and 2028 on an amend and extend basis. Following refinancing, there will be no significant debt maturing until 2027, excluding the PNG project finance, which is repaid during project cash flows. Approximately 45% of total debt portfolio is PNG LNG project finance debt and which is forecast to be repaid by 2026. Net debt, including lease liabilities, was $4.1 billion at the end of June. We hold strong liquidity of $5.4 billion, comprising $3.4 billion in cash and $3.1 billion in committed undrawn debt. Under our capital management framework, we are now targeting gearing to be less than 25%. The strong free cash flows generated during the first half have supported rapidly gearing to 22.5%. With reduced gearing and a strengthened balance sheet, we are ready to fund our projects and the energy transition. Thank you. And I'll now hand you back to Kevin.

Thanks, Anthea. In summary, as I said at the outset, I'm very pleased to present a record set of financial results. We have been and remain unrelenting in sticking to our strategy and implementing our disciplined low-cost operating model, an operating model that has proven its value by delivering consistent results keeping the business resilient and performing strongly. We continue to generate strong free cash flows, maintain the strength of our balance sheet and provide returns to shareholders. Thank you. We'll now be happy to take your questions.

[Operator Instructions] Your first question comes from Tom Allen with UBS.

Just on capital management firstly. The distribution payout range for free cash generated when oil price is above $65 a barrel is fairly broad with a payout of at least 40%. And Slide 22 was helpful, but I was wondering if you could please describe the key considerations or a framework that have led the Board to arrive at a payout of 41% of free cash generated over $65 a barrel, just recognizing the average dated Brent over the half was comfortably over $100 a barrel?

Yes. So the 41% really, was looking at over 40% and rounded up to $350 million, which is where we got the 41%. It's a board-by-board decision that will take into account a number of factors, including what we have coming up, prevailing oil prices, debt repayments, et cetera. So that was a decision for this Board was to maintain it at the -- just over 40%, but it is a board-by-board decision.

Sure, sure. So commodity prices, is there a bit of a tighter range on leverage that you think but might see a scenario where the board pay a much higher payout on that component?

Well, look, I mean, I think, Tom, that will be a decision for the Board to take just as with dividends based on the prevailing conditions at that time. And it's something that the Board will give consideration to as we go forward. There's a lot of flexibility in that, as you can see.

Yes. No, that makes sense. Just at PNG LNG, so the Unipec and BP midterm LNG SPA expire, I think, in March and July next year, respectively. Just wondering if you could provide some color on the marketing strategy for that LNG. So might we see a shift to an equity marketing model at PNG LNG? And might that volume be sold at a JKM indexation for the second half of next year?

Well, look, Tom, we don't -- you're right in terms of the renegotiation dates that you referred to. We don't -- we can't comment on the specific negotiation strategies. We will obviously inform the market if and when we're in a position to do so. But we work alongside the operator and other joint venture partners to develop those strategies and obviously, to agree what the outcomes are, it's not what any one party wants and we'll inform you when we'll get something to tell you.

Of course. That makes sense. And then just finally, congratulations on taking FID on Phase 1 in Alaska. Now that you've committed to develop that project, can you please just clarify Santos' sell-down aspirations from here? You mentioned that Santos was unable to agree an equity sell-down to date. I just want to confirm if the process has now concluded for the time being?

Well, look, I mean, I think as I've said previously in my speech today, we don't think we have to wait to develop this project for other folks that has been interesting in the project and good interest in the project. But as I said in my speech, we've been unable to get anything agreed in the time frame to date. And we do know that others see value, but we think it was a project that will become more valuable over time. And we think now is the time to develop it. We talked a lot about how the world has changed over the last 6 months. And as I said, we don't need to wait and sell down before we can move it forward. But we're still open to sell down during the development phase, just like we did on the Barossa project, where we sold down to JERA after FID.

Your next question comes from James Redfern with Bank of America.

I just wanted to ask the first one around the 5% sell-down in PNG LNG. I'm just wondering, can you confirm that Exxon is happy for Santos to continue to have a higher equity stake than them of 37.5% in PNG LNG post sell-down? And then also, will that [indiscernible] in sell down achieve your target of $2 billion to $3 billion of sale proceeds?

Thank you, James. Look, I think the first question is an easy one for me to answer. I can forward you the mobile numbers of the executives at Exxon, and it's really a question for them. I can't comment on whether they're happy or unhappy. Put it this way, they haven't communicated to me that they're unhappy of any problem with what our equity position is. And we do enjoy a very positive and strong relationship with Exxon, a lot of respect for them. They are a very safe and extremely competent operator. And in terms of the second part of the question, that was focused on the sell-down. Yes, $2 billion to $3 billion process. What we're really seeing there is that we think that period, that process, if you like, the optimization process we were running is coming to an end. Now we expect to complete the 5% sell-down in PNG over the next couple of months, I would expect that to be closed. We're very happy with the valuation as part of that process, and we've given you some guidance in terms of consensus. And so we're very comfortable with the valuation of the asset. In terms of the overall number you're talking about, we've completed the JERA sell-down, we will get the value for that. I think what you have to take into consideration as well, James, is that these assets are generating very considerable cash and they have done during this period, and we will keep that cash. And so we've made a decision to draw a line in that sand and not simply stick to our target because I put a target out there in February before the Russian invasion of Ukraine, not going to be that stubborn, at the end of the day, we think these assets have generated a lot of cash. We're very positive on the outlook for our commodities. And as such, that will be drawing a line under that process. In absolute capital basis that might fall just slightly short of the lower end of that range. But I think if you put the cash flows into that number as well, it will be comfortably over the bottom end of the range. And we believe it's the highest value outcome for our shareholders over the longer term.

Okay. Excellent. And just a second question, if I can, please. Just in relation to Dorado, FID has been delayed possibly to next year at the earliest, given the inflationary pressures and supply chain issues. So I'm just maybe wondering if you could please comment on what you're seeing in terms of CapEx inflation relative to the CapEx guidance that was provided for Dorado previously?

Well, thanks for that, James. I mean, unlike Pikka, where we've been able to lock in very competitive rates through our contracts, what we found with Dorado really was quite a different environment. I mean the shipyards environments across Asia, the contractor availabilities, the impacts of COVID still with some of those workforces. And of course, the labor shortages we're seeing in certain parts, all add to a very inflationary environment. In addition to that, we've seen volatility in the contractor environment where at least one of our contractors has gone into [ Chapter 11 ] during the period. And we think there are other liquidity issues with some of the contractors out there. And when you put all of that together and the inflationary numbers we saw coming through in the project, it just doesn't make sense. Now when you couple through that the fact that we had a successful drilling result at Pavo, however, one that was a little bit unexpected in terms of the fluid composition. We want to establish a bit more gas before we take FID. And bottom line is that the concept will then need to change for what will effectively become a better project but a different project. And so we've not put a time line on that, James, we have a bit of work to do, probably a little bit more appraisal and a bit more engineering work to optimize the concept.

Your next question comes from Mark Wiseman with Macquarie.

Just I had a question on Dorado as well. Can we just clarify the Phase 2 project, which was the gas development? It sounds like that will now form part of the first phase. So it would be an oil development with a tieback to Varanus Island for the gas from the beginning. Am I hearing that correctly?

What you're hearing me say, Mark, is that we believe that's the concept, an integrated concept that includes the development of gas reserves in the basin. We believe there are very significant gas reserves in the basin. And if we can get a development that gives us backfill for Varanus Island for the longer term without having to go spending significant CapEx up and down the Carnarvon Basin chasing backfill. We see that as an optimal outcome for all parties. And so your point is correct. We're viewing this now as an integrated oil and gas project from day one.

Okay. Fantastic. And just on Slide 6, the committed projects CapEx of $7 billion, it actually sounds a little lower than we would have expected given the backfill projects on the old Santos assets. I would assume to PNG that that number would include [ Juha ] [indiscernible] I guess we would have expected some ongoing CapEx in the Cooper Basin and at GLNG. I just wonder if you could provide some discussion around what's in that number beyond the major growth projects that you've specified there.

All right. So thanks for that, Mark. Look, we're talking here about the major project CapEx here, major growth CapEx as we refer to it. So your Cooper Basin sustaining CapEx before is before the generation of free cash flow, right? So that's self-funded and as before it's absorbed, if you like, in those free cash flow numbers. So we're only really talking about the CapEx here for major growth projects. And what's important is to recognize that we're seeing only committed projects. So we're not including non-committed projects. We may not do them. And that's why we see in the other parts of that chart that the [indiscernible] be for returns to shareholders, and of course, or investment in either our climate transition action plan projects or development projects in the future if they became FID projects. But at this point in time, we've not included any project in there that's not committed. We'll try to give some guidance on that on the chart by listing the major projects that are included in that $7 billion number.

Okay. Okay. And I just wondered on the East Coast gas market discussion and the atopic projected shortage for next year, I just wondered if you could provide any updates on whether the Heads of Agreement can potentially be reached here? Is there anything you're able to say on that?

Well, look, I think, Mark, what I would say is that there hasn't been a shortfall in the last 6 years. It's not the first time. One of the forecasters has predicted there would be, there never has been. I don't believe there will be next year either. The LNG projects have worked collaboratively over that time since the first introduction of ADGSM through the existing HOA to ensure supply was made available to the market. I believe that we can work again with government to make sure that the supply is available to the market. as I've said repeatedly, there is more on contracted gas than any predicted shortfall, but I still don't actually believe there will be a shortfall. I think it's important to look at the assumptions in the ACCC report and there are some wide-ranging assumptions there that I wouldn't necessarily agree with all of them. All of those things won't come to pass, I suspect. And hence, I don't believe there will be a shortage. And I go back to the point, Mark. There wasn't a shortage this year either. There was a drop in supply of coal and an efficiency of renewables that meant the gas that was meant for the existing normal domestic market was pulled away for power gen, and that led to the short-term very significant gas spikes that we saw.

Your next question comes from Dale Koenders with Barrenjoey.

Just a couple of quick questions. Firstly, just building on your comments, Kevin, around shipyards and COVID impacts and labor shortages and et cetera and the challenges for Dorado. Can you sort of explain why those pressures are any different for the Darwin backfill project? And why we should be anticipating delays in CapEx broadly?

Yes. Well, look, first of all, I mean, Barossa's contracting was done much earlier. And we got our lump sum contracts, got our shipyard slots. And we've -- I can't remember the number, but a large percentage of our contracts in the Barossa project are fixed price. And of course, at this point in time, we're well advanced. So one of the advantages of the Barossa project was, in fact, that we started it at a point in time where not many people would start the project. We started it in 2021 when we're still during the pandemic. So that's given us a bit of a head start before many of these inflationary pressures have come through. And that may be a good fortune rather than good design, but it's kind of worked in our favor. We are seeing inflationary pressures on the variable components of the project. And if you speak to some of our contractors, we have seen some impact. But so far, we've been able to work with that within our contingency allocations in the project. And for example, we have put with a shipyard component of that project, we have put some incentives in place to assist the shipyard contractors. But so far, so good, and we're obviously putting very, very close attention to it. But at this stage, Barossa is traveling very well.

Okay. So no CapEx overrun anticipated I guess, the takeaway. Secondly, just on the structure of the dividend with free cash flow effectively the tier above $65 a barrel. Should we continue to -- should we assume that going forward, that continues to be a buyback on market? Or will that vary between dividends and buybacks and other things?

Well, look, I mean, I can't think of why it would change in the short term, particularly elsewhere we have a franking credits. But what I would say is that -- and I have to say is that that will be a decision for the Board every time -- every 6 months, we take this recommendation to the board that the dividends and the buyback decisions are decisions for the Board.

Okay. But I guess the signal is you think it's a good investment in your stock at the current share prices?

If you're asking me, do I think Santos is significantly undervalued, you would not be surprised to hear me say yes. I would probably say that most things, the share price in this climate $90 to $100 oil. I think that we are very significantly undervalued and I think that's a good use of the funds for shareholders.

And then Finally, just on CapEx for the East Coast gas market, your joint venture partner Beach has sort of spoken about $0.5 billion over the next 12 months. A lot of that is western flank oil, not a project you're involved in. But drilling for the Cooper Basin JV 100 wells per annum, do you think that, that rate will continue indefinitely over the next few years? And what sort of contributions to production increases do you think that, that will provide?

Well, look, I mean, we just had the Cooper Basin absolutely humming in 2018/'19 before COVID came along, and we saw the reduction in CapEx in the Cooper Basin, resulting in a drop in number of wells over three consecutive terms. And of course, we're seeing production drop in the Cooper Basin as a consequence of that. Pleasingly, we're beginning to see it bottom out and turning back up again as we, we're drilling more wells this year. I think we're forecasting around 110 wells this year, and we're starting to connect those wells. We're starting to see it turning around just as we did back in 2018 when we went through this same experience. So I'm confident in the medium term that -- and I think your question goes to, will we have enough good prospects to keep drilling that number of wells each year? Pleasingly, we're seeing a lot of good wells coming on, some good production rigs from some of the new wells coming on. And there's still a lot of gas and a lot of liquids across the Cooper Basin. And thus far, at least, it's a function of how many wells we're drilling. But look, we hope to get that production back up. And like I say, around about 100 to 110 wells a year seems to be the steady state efficient model. It works well for the Cooper Basin, and that's what we're aiming to get back to.

Your next question comes from Saul Kavonic with Credit Suisse.

Look, a few questions, but perhaps just starting with what are the strategic thoughts behind reweighting the portfolio away from near-term LNG by small sell-down to PNG LNG and more into long-term oil given general market sentiment prefers more weightings to LNG and less weightings to long-life oil? And what do you say to the idea that selling the market's favorite asset, which is PNG LNG and [indiscernible] nearby Dorado, which is relatively smaller, shorter cycle oil project in order to do Alaska is actually doing the opposite of what most investors want?

Thanks for the question. So look, I mean, first of all, it's really about ensuring we've got a balanced and diverse portfolio of assets and really avoiding over concentrating in any one place. And hence, we're only selling 5%, but we think [ 37.5% ] is a good equity level to move forward in PNG. In terms of Alaska, it's really about delivering the highest value outcome from that resource and from that opportunity for our shareholders. We're not doing a Dorado. We still see value in Dorado, but we don't think the project is right to go forward at this point in time. And quite frankly, I'm pleased that we're able to show the discipline to kind of step back if a project is not ready rather than diving in and going forward at all costs. And so look, I think it's a disciplined approach. We can't develop everything at once. But from a portfolio basis, it's really just a case of diversification, not only across products, but across different regions as well. We actually see that we'll grow our LNG production over the next few years. And when Barossa comes on, of course, we've got a very strong linkage to JKM from 2025. So we're pretty happy with our portfolio balance going forward.

Further on the PNG LNG sell-down where you mentioned you have line of sight to this being in line with consensus, could you perhaps just elaborate on what your view of consensus is? And does consensus refer to what the consensus value for the asset is per percentage point? Or does it refer to what consensus you over sell down will achieve, which some people are doing at significant discount to the asset value?

Yes. Look, I mean, first of all, it's consensus to what the asset valuation, the market asset valuation is because we're in negotiations and discussions with the shortlisted parties, I'm not going to put a number out there, there so. But what I would say is any of the numbers I've seen flying around, I'm very comfortable with those numbers that are flying around.

Understood. If we were to rewind about 6 months ago, I think there was kind of market expectations that Alaska would be sold completely. You take some big sell-downs of Dorado and PNG LNG and then there could be scope for a big buyback. It's almost like there's been in [indiscernible] all of those expectations. Is there any prospect of a large buyback occurring now or larger capital management beyond the current formulary that you framed or the $2 billion to $3 billion sale down targets kind of on the back burner now and the scope for additional upside to capital management isn't really there in the near term?

Well, look, I mean, first of all, I can't remember ever saying there was going to be ever any major buyback. I don't think we ever put that out there, but that may well have been an expectation of some. What I would say, Saul, is what I said earlier. The world has changed a lot in the last 6 months. There's a focus on energy security that wasn't really there when we last talked results in February. And since then, the world has changed very considerably. When it comes to Alaska, we did run a process. We were not able to get the sell down, we want if -- that we thought was a good value outcome in that time frame. And that's not to say that we will not sell down during the development phase, as I've said earlier on, just as we did with the Barossa project, and we're open to that. We'll remain open to that. But we do believe that project will become more valuable with time. And we believe that the need for oil production and from an energy security point of view, has increased quite significantly during that period, and we'll get a lot of support for that project. So look, I mean, I think, as I said in the speech, we don't need to wait to sell down. We believe now is the time to develop it. And if we do sell down during development phase, we'll update you when we do that. As for any major one-off buybacks, I'd say the Board's focus was more on a rolling buyback program, which we have communicated to the market a few months ago, and Anthea has talked about that on this call today. That's our focus. If we get into a position where we accumulate a lot of cash, we go below the sort of bottom of our gearing range then that may be a consideration for the Board at that particular time.

Just on the balance sheet, obviously, forward curve prices are high now, but we're also heading into a recession, so we can't discount downside scenarios. If we do see a downturn, oil goes back to $40, $50 for a few years, where does that leave balance sheet, credit ratings, those kind of metrics for the next few years now that you are committed to Pikka and Barossa?

Well, Barossa is 43%. I'll let Anthea talk about credit ratings in a second. But what I would say is we're going to continue to run the business in a very disciplined manner of funding it within our means. And we run our business, as you know, on a free cash flow breakeven basis across our assets, none of that will change. I was pleased to see in the results, if you back out the late life production costs by [ one, then ] you'll see our average production costs are lower than they've been at any other point in time over my 6 years here in the company despite the inflation challenges we're seeing across the industry. And I was also pleased to see that the integration synergies we've delivered around USD 106 million at the end, sustainable annual synergies at the end of last month, and we've upped the guidance now between $110 million and $120 million, $125 million in fact, in annual synergies. So I'm pleased to see we're still making progress and maintaining that discipline of running the company with a low-cost focus. And Anthea, do you want to talk about credit ratings?

Yes. I suppose just to add to that, so the disciplined operating model does ensure that from a sustaining business, we are resilient at lower prices. We do phase our CapEx to live within our means. We do model forward views at downside oil prices to ensure that the portfolio is resilient to lower prices. Having a kind of a degeared balance sheet, the gearing has come down considerably over this year, that positions us quite well if there was a downturn in the future. From a credit metric perspective, we're extremely strong in the metrics. So there's definitely room to move from a credit rating perspective and having the three ratings there is very helpful to you. So we're fairly comfortable if there was a dip in the oil price in time that we'd be very well positioned to get through that without losing the credit rating.