Santos share price lifts despite non-cash impairment of up to US$800 million

On Tuesday, the Santos Ltd (ASX: STO) share price rose 3.79% to $5.33 despite an announcement that the company would take a non-cash write down of US$700–US$800 million before tax in its half year results. 

What was in the announcement?

Santos announced that it will take a non-cash impairment of US$700–US$800 million in its half year results (to be released on 20 August). According to the company, the impairment is a result of revised oil price assumptions due to the effect of the coronavirus on energy market demand. 

The write down by Santos will consist of a non-cash impairment to its Gladstone liquid natural gas asset in Queensland of US$640–US$700 million before tax, along with an impairment to its exploration assets of US$60–US$100 million before tax. The company stated that its reserves would not be affected.

Santos reported that the write downs would increase gearing by 1.5%, however, it also stated that debt covenants would not be under threat for a number of years at current oil prices.

Commenting on the write downs, Santos Managing Director and CEO Kevin Gallagher said:

Since 2016, Santos has implemented a disciplined operating model that is focused on generating free cash flow through the oil price cycle.

In response to COVID-19 and the lower 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.

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.

Gallagher also highlighted that Santos is well positioned to leverage its growth opportunities when business conditions improve. The company also announced that the impairment would be excluded from underlying earnings and was subject to auditor processes and board approval.

About the Santos share price

Santos is an Australian energy producer that specialises in liquid natural gas. It has assets in Northern Australia and Timor Leste. Santos is Australia’s biggest domestic natural gas supplier and has operated for more than 65 years. 

Earlier this month, Santos announced that the Mahalo gas project, in which it holds a 30% stake, had been granted a 30-year petroleum lease by the Queensland state government. 

In May, Santos announced that it had made an acquisition of assets in Northern Australia and Timor Leste from ConocoPhillips for US$1.265 billion, along with a contingent payment of $200 million.

In the first quarter of 2020, the company produced free cash flow of US$265 million. It had net debt of $3.1 billion.

The Santos share price is up 95% from its 52 week low of $2.73. It has returned -35% since the beginning of the year. The Santos share price is down 22% since this time last year.

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Motley Fool contributor Chris Chitty has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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