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- Oil and gas giant Santos (STO) will be taking a financial blow to the tune of over one billion dollars in response to COVID-19’s ravaging of the oil market
- The company is writing down the value of its GLNG project and exploration assets in the Cooper and Amadeus basins
- The impairment comes as Santos downgrades its oil price assumptions through to 2025
- Importantly, the write-down is a non-cash impairment, meaning it will have no impact on half-yearly earnings and cash flow
- Despite today’s news, Santos shares closed roughly three and a half per cent higher at $5.34 each
Santos (STO) will be taking a financial blow to the tune of over one billion dollars in response to COVID-19’s ravaging of the oil market.
Santos joins the ranks of BP and Woodside Petroleum which have also revealed multi-billion writedowns over the past few months.
The majority of Santos’ blow comes from the non-cash impairment of its GLNG project of between US$640 million and US$700 million (between roughly A$908 million and roughly $994 million).
The energy company will be taking an impairment of up to US$100 million (roughly A$142 million) on its exploration assets in the Cooper and Amadeus Basins.
The company is slashing the value of these major projects as it lowers its oil price assumptions for the next half-decade.
For the near future, Santos is assuming the average price of Brent crude will be as low as US$45 per barrel. This is expected to rise to roughly US$50 per barrel in 2021 and US$62.5 per barrel over 2023.
Despite the write-down, Santos Managing Director and CEO Kevin Gallagher said the company is still well-positioned to leverage some growth opportunities when business conditions improve.
“Since 2016, Santos has implemented a disciplined operating model that is focussed on generating free cash flow through the oil price cycle,” Kevin said.
“In response to COVID-19 and the lower oil price environment, Santos announced in March financial measures including reductions in capital and operating expenditure, and a target 2020 free cash flow breakeven oil price of US$25 per barrel,” he said.
“Our disciplined operating model combined with the proactive measures taken to reduce expenditure saw Santos generate more than US$430 million in free cash flow in the first half of 2020 despite significantly lower oil prices,” he said.
Santos assured investors the impairment will have no impact on earnings or cash flow given its non-cash nature.
It seems it was a good a day as any for Santos to reveal the impairment, however, as investors seemed caught up in general market sentiment today. Santos shares tacked on 3.49 per cent despite the news to close worth $5.34 each.
