Santos hits record first-half revenue as it targets Oil Search merger

Energy giant Santos has hit record-high sales revenue across the first half and raised its output target as the company pursues a $23 billion merger with rival Oil Search.

After coronavirus lockdowns sent prices of the fossil fuels crashing to multi-year lows during 2020, the gradual re-opening of economies and strengthening demand particularly in northern Asia have been boosting sales for Australia’s energy exporters.

Adelaide-based Santos is pursuing a $23 billion merger with rival listed oil and gas producer Oil Search.Credit:Brendan Esposito

Santos managing director Kevin Gallagher said improved commodity prices had delivered record-high quarterly sales revenue of $US1.1 billion ($1.5 billion) for the Adelaide-based producer, bringing sales revenue over the six months to June 30 to a record-breaking $US2.04 billion.

“Our disciplined, low-cost operating model continues to drive strong performance with $US572 million of free cash flow generated in the first half, and the business remains on track to deliver a free cash flow break-even oil price of $US25 per barrel this year,” he said.

“At current oil prices, Santos should generate over $US1.1 billion in free cash flow in 2021.”

The Brent oil benchmark price is back around $US70 a barrel while markets for liquefied natural gas (LNG) have also been rallying. A colder and longer-than-usual northern hemisphere winter increased demand for heating and drained stockpiles, while post-COVID-19 economic recoveries and the easing of travel curbs are supporting higher energy consumption. Ahead of a hotter-than-expected summer, gas importers have also been restocking LNG to meet a jump in energy demand from air-conditioning.

Santos also raised its full-year production target, saying it now expects to produce between 87 and 91 million barrels of oil equivalent in 2021, higher than its previous forecast of 84-91 million barrels.

The ASX-listed energy producer this week stunned investors when it revealed it had lobbed a bid to merge with Papua New Guinea-focused rival Oil Search and form a $23 billion combined entity.

In its pitch to the Oil Search board, Santos said combining their portfolios of long-life assets would create an “unrivalled regional champion of size and scale” with a stronger balance sheet and less risk as the industry encounters pressure over its contribution to global warming.

Oil Search, which turned down the bid earlier this month, is facing pressure from some investors to re-engage with Santos over an offer.

LNG is one of the nation’s largest export commodities, accounting for $32 billion in export revenue in the past financial year. The federal government expects this to increase sharply in the coming 12 months to $49 billion.

However, oil and gas companies are also facing escalating pressure on climate change and the prospect of demand for their commodities slipping faster and steeper in the future than previously expected. While natural gas is helping to reduce emissions in parts of the world by displacing coal-fired power, the International Energy Agency released a landmark report in May that warned investors must avoid funding any new oil and gas fields for the world to achieve the Paris accord’s aspirational goal of limiting global temperature rises to 1.5 degrees.

Business reporter for The Age and Sydney Morning Herald.

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