Adelaide Aug 21, 2015 (Thomson StreetEvents) -- Edited Transcript of Santos Ltd earnings conference call or presentation Friday, August 21, 2015 at 1:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * David Knox Santos Ltd. - MD and CEO * Andrew Seaton Santos Ltd. - CFO ================================================================================ Conference Call Participants ================================================================================ * John Hirjee Deutsche Bank - Analyst * Dale Koenders Citigroup - Analyst * Kirit Hira Macquarie - Analyst * Mark Samter Credit Suisse - Analyst * Nik Burns UBS - Analyst * Stuart Baker Morgan Stanley - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [1] -------------------------------------------------------------------------------- Thank you, Kevin, and good morning and welcome to Santos' 2015 half-year results conference call. Joining me on the line today is CFO Andrew Seaton. Before we go to the results review, I want to make a few brief remarks about the Company's announcement today about the commencement of a CEO transition process, and of course a very important strategic review. As Peter Coates has said this morning, the Board and I have agreed that with GLNG all but ready to commence production, on time and within the $18.5b budget, it's an appropriate opportunity to commence the process of recruiting a new CEO for Santos. I've had the privilege of leading this Company now for seven years. I've relished every minute of working with the truly fantastic people who make up the Santos team. In particular, I'd like to acknowledge the tremendous support from my stable leadership team over the last seven years. I would also like to thank the whole Santos team, who delivered a great operating and safety result during such a groundbreaking time for the Company. I truly hope that my successor is ultimately chosen from the team, because there's no shortage of talent on the bench, but I agree the Board needs to undertake a global search that will consider all potential candidates in making their final selection, to ensure that we have the right person for the job. Of course, we don't know how long that recruitment process will take, but we do know that we have a mountain of work to carry on in the meantime. I want to reassure shareholders that I will remain absolutely focused on delivering the best possible operational performance Santos can deliver. Now, with regard to the strategic review, I want to say that I continue to believe that Santos can weather the current downturn in global oil prices, and that the quality of our projects and strategy will stand the test of time. However, I also acknowledge that the Board must do all it can to address the continuing impact the current oil price environment is having on our share price. An all-encompassing review is both, therefore, appropriate in terms of timing and also scope. As the Chairman has outlined, the thorough strategic review will look at all options to maximize shareholder value. Santos has built and secured some high-quality assets and resource positions. The Company needs to protect that value, while also achieving far better market recognition than shareholders are seeing today. The review will include talking with the parties who've approached us to date, with interest in various assets and other strategic initiatives. And with this announcement, there may well be new expressions of interest received. No options will be ruled out from consideration, but neither is any particular option a preferred course at this time. With the CEO transition process getting underway, it is appropriate that the review is conducted by the Company's Chairman Peter Coates, assisted by members of the senior management team as Peter requires. So now I'm going to turn to the half-year results, and I'm referring to the presentation that's been released this morning and is available on our website. On the cover of the deck, you can see a picture of the GLNG plant. Now, this shot was taken about a month ago, and you can see that we're on the home straight. I was pleased to announce this week that we now have gas into the front end of Train 1 and all six refrigerant compressors have been run and tested. We are now well into the final commissioning process, to produce first LNG around the end of September. Now I'm turning to slide 3. I want to report on the important highlights from the first half and talk about how we will further strengthen the Company's operations as we progress through the second half of 2015. First, our results today underscore the continuing improvement in the Company's operational performance. Strengthening our operations has been essential, given the impact of market forces the whole industry continues to face. We cannot control the oil price, but there are many things that we can control and I believe we responded swiftly and continue to act appropriately. Our operating performance demonstrates that we're buttressing the business to weather the likely oil price environment over the coming 12 to 18 months. Second, on the issue of market outlook for oil and LNG, we will outline how the Company has positioned itself. Finally, I'm pleased to provide you with what will be our final update on the progress of GLNG before it goes into production from Train 1. So to my first point on improved operating efficiency, and I'm on slide 4. The Company has made good progress in repositioning for a period of low oil prices. Central to our work is a significantly revised capital expenditure program. CapEx has been focused on the assets that will deliver the greatest value to the Company in the near term. As a result, CapEx has been cut by 55% in the first half. Basically, we're cutting all CapEx which does not deliver good returns in low oil prices. Furthermore, we're reducing execution costs for the same scope of work. We continue to drive efficiency and innovation through well pipe design, for example, and are driving a low-cost culture by removing all discretionary spend. For example, our travel budget this year is down by 65%. As a result of these initiatives, Santos is producing more for less. While production is up 13%, our focus on cutting operating costs during the first half has unit production costs tracking below the guidance at AUD13.70 per barrel. That's 11% lower than the previous half. But we're not done yet, and you should expect to see us make further progress on cost reduction and efficiencies during the second half. In line with this approach, I recently announced Brett Woods as Vice President for Eastern Australia. Brett is tasked with the simplification of the EA business and on driving costs out. This will result in more gas and less cost, while maintaining safe operations. The Company's efforts will see it free cash flow positive, that is, after interest, tax and all CapEx, in 2016 and beyond at current oil prices and exchange rates. So let me now turn to the second point of my introductory remarks, on slide 5, our view of the oil market over the immediate and then the longer term. Over the first half of this year, Santos' average realized oil price was $60 per barrel, that's US, 47% lower than the previous first half of $115 per barrel. More recently, the oil price has traded sub-$50, as we all know. The current market remains oversupplied on the back of OPEC continuing to defend market share and production in the United States proving resilient. Production appears to have peaked in the United States, as field decline kicks in and well CapEx starts to fall. However, sentiment remains negative, reflecting concerns about lower economic growth in emerging markets, expectations of higher oil exports from Iran and continuing expected growth in global inventories. Despite these negative drivers of sentiment, there are fundamental market drivers at play. Demand growth more recently has surprised on the upside, as customers and consumers respond to lower prices. As the chart on slide 5 shows, the IEA has recently revised their 2015 oil demand growth forecast by 0.2m barrels per day to 1.6m barrels per day. That's the fastest pace in five years. Not only has demand growth in the first half of this year been significantly stronger than in 2014, but it's also forecast to remain stronger through the second half of 2015 and all of 2016. All companies have responded to the current conditions by cutting CapEx, and when you cut CapEx oil fields decline. The physics tells you that production will fall and in the long term the cycle will resume. It's just a matter of how long this particular cycle will take to play out. I'm going to save my update on GLNG and other operations until Andrew has delivered his commentary on our financials. Before I hand over to Andrew, I also want to comment on our continuing strong safety performance, and I'm now turning to slide 6. It is encouraging to see that during a period of uncertainty and external pressures, we have delivered an exceptional safety performance. Our lost time injury frequency rate is zero. That's the best in Santos' history. This is an outstanding achievement, given that we remain at high activity. I'm also pleased to say that our safety critical maintenance is also tracking above our target of 98%, year to date. Now, with that brief overview, I'm going to ask Andrew to take you through the first-half financials in some more detail. -------------------------------------------------------------------------------- Andrew Seaton, Santos Ltd. - CFO [2] -------------------------------------------------------------------------------- Thanks, David, and good morning. Turning to slide 8, you can see the financial summary for the half. Increased sales volumes were offset by the impact of oil prices being 47% lower, driving a 15% reduction in sales revenue. An important aspect of our performance was the production cost savings achieved across the business. I'll talk to this further in a subsequent slide. EBITDAX declined by 5%, underscoring the sound operational result, given the challenges faced in the current oil price environment. Net profit was impacted by a number of items, as shown in the summary table. First, exploration in 2015 is weighted to the first half. The higher exploration expense of AUD194m reflects the campaigns in PNG and also in Malaysia. The reported exploration expense has reduced slightly from our second-quarter report. This is primarily due to final well costs being lower than our prior accruals. In the second half, we'd expect an exploration and evaluation expense of approximately AUD100m. The second aspect is the increased depreciation expense. This is driven by PNG LNG moving to full production, as well as the commissioning of major upstream GLNG assets. And thirdly, higher finance expenses because of the ongoing drawdown of debt facilities, lower capitalization of interest as GLNG facilities are handed over to operations, and also the depreciation of the Australian dollar. And lastly, the high effective tax rate of 63%, which is primarily due to the PNG and Malaysian exploration expense being non-deductible in Australia. Moving to slide 9, the 13% lift in production is the highest recorded first-half production in eight years. This is a solid result, especially with the extended shutdown of the Mutineer-Exeter FPSO, which was offline for most of the first half for repairs and maintenance. The strong performance from our LNG portfolio is evident in the purple section of the bar graph, up 131% on last year. This LNG growth is going to continue as GLNG ramps up over the next few years. Our full-year guidance of 57m to 64m barrels of oil equivalent is unchanged. On slide 10, you can see crude oil sales revenue was down 51%, primarily because of the lower oil prices, but this negative was offset by other elements of our quite diverse portfolio. The domestic business delivered robust sales gas and ethane revenue, and this reflects the strength of the Company's gas operations and infrastructure position in Eastern Australia, Western Australia and also Indonesia. LNG sales revenue was up 157% in the half, driven by the strong operating performance from PNG LNG and also Darwin LNG. Moving now to production costs on slide 11, the overall increase has mainly been driven by new assets coming online. Excluding PNG LNG, base business production costs are down AUD36m compared to the first half of 2014. So on a dollar per barrel basis, the 11% reduction for the first half has us tracking below full-year guidance at AUD13.70 a barrel. Some of the main focus areas for reducing production costs stem from headcount, supply chain management, camp and travel rationalization and other process improvement initiatives. Savings momentum is building, with second-quarter cost out greater than the first quarter, as the impact of downsizing and contract negotiations take hold. For example, in the Cooper Basin business, which is our largest operated asset, absolute costs were down by 8% in the first quarter and 19% in the second quarter. Moving to the next slide, I want to give you a little more detail around how we are resetting our cost base. Staff headcount is down by 565 positions. This alone has delivered a gross labor savings of AUD100m per annum. Contractor headcount is down almost double the staff headcount reduction. We're on track to achieve AUD180m gross supply chain savings in 2015, and some examples of the rate savings are given on the right-hand side of this slide. We have already renegotiated more than 200 contracts, delivering meaningful savings, such as 16% savings in onshore drilling rig rentals, 37% in rig move rates, between 33% and 67% savings on well evaluation activities, including testing and logging, and 14% to 31% savings across a range of maintenance, reliability and operating contracts. Turning now to operating cash flow, on slide 13, the Company achieved operating cash flow of more than AUD0.5b for the six months, despite the dramatically reduced oil price environment. Becoming free cash flow positive has been and is the absolute focus for management. Notwithstanding continued low oil prices, we expect to be free cash flow positive in 2016 at a prevailing oil price of between $45 and $50 a barrel, assuming FX rates of between $0.70 and $0.75. On the next slide, slide 14, you can see the breakdown of capital expenditure of AUD845m in the first half. With the major LNG CapEx period ending, we have focused on a low-cost sustainable strategy. The AUD200m exploration spend included closing out the five well offshore Malaysia campaign, which we committed to before the material drop in oil prices last November. This spend, of course, delivered the significant Bestari oil discovery. Our full-year CapEx guidance of AUD2b excluding capitalized interest is maintained. In 2016, we expect CapEx to further reduce to around AUD1.2b across the portfolio. Looking at the balance sheet and funding, on slide 15, the waterfall chart shows the reconciliation of current debt of AUD8.8b against yearend 2014 debt of AUD7.5b. The A dollar/US dollar foreign exchange rate depreciated by 5 cents over the six months to June this year. This alone has resulted in an increase of almost AUD500m in net debt, in Australian dollar terms. And while the weaker exchange rate has increased the headline debt number, you also have to remember that it's increased the Australian dollar value of our US dollar denominated assets, and also the associated cash flows. Investing activities in the cash flow statement are higher than the CapEx figure on the previous slide due to net acquisition costs, capitalized interest paid and also working capital movements. Turning to our debt maturity profile, on slide 16, during the half we successfully refinanced AUD800m, with very strong support from our existing banks and also a number of new banks. Our average pretax borrowing cost of just over 4% before tax is significantly lower than the prior year. Whilst we maintain a strong liquidity position and have minimal near-term maturities, we do acknowledge that our high level of debt at a time of weak oil prices has resulted in pressure on the Company's share price, and that's why the Board has today announced a strategic review to be led by Peter Coates, as Executive Chairman, to look at all options for the Company moving forward. Turning to slide 17 and dividends, the Board has set the 2015 interim dividend at AUD0.15 per share, fully franked. The dividend reinvestment plan will be in effect for the interim dividend and will be fully underwritten. DRP shares will be issued at a 2.5% discount. In summary, I'd characterize the half year as sound operationally but clearly challenging, given the low oil price. Cost savings have been relentlessly pursued across the business and material savings are being achieved. CapEx has been driven down substantially. GLNG, as David will touch on in a minute, is progressing very well towards startup around the end of September, within budget. And with AUD2.2b in cash and undrawn debt facilities, we have adequate balance sheet liquidity. And with that, I'll hand back to David. -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [3] -------------------------------------------------------------------------------- Thank you, Andrew. As Andrew has made clear, we as a company are absolutely focused on driving productivity and managing costs right across the business. Moving now to slide 19, with both Darwin LNG and Papua New Guinea LNG are producing ahead of expectations, significant production and volume growth was obviously recorded in the first half of the year. The increase in LNG revenues underscores the impact Santos' LNG strategy is already having on the Company. With the imminent startup of GLNG, we stand to increasingly benefit from the long-term revenue streams underpinned by firm 20-year offtake agreements. The Bayu Undan Phase 3 drilling program was delivered in the first quarter, resulting in incremental gas and liquids recovery and higher offshore well capacity. Further, significant upside result at the Barossa-3 well, which was drilled late last year, has strengthened our resource position. It also ensures -- it ensures that the Barossa field, of which we own 25%, is well positioned to provide long-term supply to the Darwin LNG plant. Papua New Guinea LNG is continuing to perform above our expectations, producing well above its nameplate capacity. 118 cargoes have now been shipped, and we remain confident that further debottlenecking and expansion opportunities remain on the table. This has been a very good investment for Santos and an important addition to our LNG portfolio. I'm now turning to GLNG, on slide 20. First, let's look at the upstream, where the Fairview field continues to exceed expectations. Field capacity is on track to reach 600 terajoules a day by the end of this year. The average well capacity has increased from 1.6 terajoules a day in March to almost 2 terajoules a day in July. At Roma, 120 wells that were brought online late last year continue to ramp up, in line with our expectations. We're continuing our connection program in the second half and we'll have 200 Roma wells online and dewatering by the end of this year. We remain confident that the future production capacity of Roma field will comfortably achieve our planning assumptions. We have now sanctioned Roma West 2B. This will see another 159 wells connected through 2016 and into early 2017. Roma West 2B will add another 140 terajoules a day of hub compression capacity. This will take the total existing and sanctioned gross upstream compression capacity for the project from 725 terajoules a day up to 865 terajoules a day. Now, we've also been testing our Fairview facilities, hubs 4 and 5, under full load, and they have performed very well. We therefore expect rates to increase by circa 5% once these systems are fully operational. In summary, the upstream is in very good shape and we are ready to go. Now, I'd like to take a moment to briefly talk about cost efficiencies that have been driven in GLNG. The GLNG upstream is a good example of the Company's work to increase efficiency and reduce costs. Here, we've developed an organization that in terms of its structure, skill set and culture is driving down unit costs of production month on month. The transition from an EPC model to self-management was critical. It has allowed us to apply learnings from both within the business and from across the industry, to deliver savings in both time and also budget. Across drilling, completions, flow lines, connections, we've focused on standardizing the designs. Whether it is well design or surface facility design, this approach has contributed to our driving drilling and completion costs down by a remarkable 69% of what they were in 2012. Our construction costs are down by around 50% on a like-for-like basis of what we had estimated at FID in 2011. This result is not by accident. It's an outcome of the capability we've now built within the project. It puts us in a great position to continue to deliver ongoing efficiencies, as we bring the whole GLNG system online over the coming weeks. I'm now moving to slide 22, on Curtis Island. The delivery of feed gas into the front end of Train 1 was a key milestone. Since March, when first gas was introduced to the plant, all Train 1 utilities have been commissioned and are now fully operational. The wet and dry flares are commissioned and operational. The jetty is complete and the LNG tanks are ready to receive their first LNG. Loading of the propane and ethylene refrigerants into storage is almost complete, and the six LNG Train 1 refrigeration compressors have now been run successfully and tested on full load. We will shortly feed gas into the amine unit and then the molecular sieves, and then commence the drying of the whole of the LNG plant. We have 110 Santos GLNG employees embedded in the integrated Bechtel/GLNG commissioning and startup team. And Train 2 remains on schedule and it will be ready for startup by the end of 2015. GLNG is on time and is on budget. I'm now going to move to exploration, and I'm on slide 23. Our exploration program in the first half of 2015 has seen the Company drill six important exploration wells, Hides Deep in Papua New Guinea, Gaschnitz-2 in the Cooper Basin and four wells offshore Malaysia. The program produced the significant oil discovery of Bestari-1 offshore Malaysia and the successful gas discovery at Gaschnitz-2. Other wells as part of this program did not intersect commercial hydrocarbons and were expensed. We are particularly excited about Bestari-1, which encountered 67 meters of net oil pay in multiple sand packages. The oil-bearing sands are of high quality, with good porosities and permeability. The JV has demonstrated the importance of this find through advance planning to drill an appraisal well later this year. Given the lower oil price environment, our exploration program is being reset with a focus on prospects which are close to the existing infrastructure, and we are deferring our frontier and emerging play investment for the future. In conclusion, the external environment is driving change to our industry, to our suppliers and to Santos. We are increasing production across the business, and we are doing so in a way that delivers ongoing cost savings. Our LNG portfolio is performing well. GLNG will shortly begin to make a positive contribution to our bottom line. Everyone is focused on driving efficiencies in everything we do, and this is evidenced through these results. Our revised capital program has been designed to navigate the short term, while delivering the production we need to maintain sustainable growth. With that, I'm going to pass back to Kevin, our operator, for questions. Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions). John Hirjee, Deutsche Bank. -------------------------------------------------------------------------------- John Hirjee, Deutsche Bank - Analyst [2] -------------------------------------------------------------------------------- Good morning, everyone. Look, I just wanted to ask you in relationship to obviously the strategic review, and I appreciate that there may not be a lot of information, but just to get some further definition around the approaches you've had, could you give us a little bit more elaboration on those and what they have involved, if you can? -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [3] -------------------------------------------------------------------------------- Thank you, John. Obviously the Board is very determined to address the impact of the falling oil prices and the continued pressure on the share price, and that is why I think it is entirely appropriate that the Chairman has announced that he himself is going to lead a strategic review on behalf of the Board. John, this is going to look at all the options. There are no preferred options at this stage. It is obviously in response to approaches we have had, and I think there will be other approaches as well. And that is an ongoing process and you will understand I can't say too much about that. This is being led by Peter. He is taking on an executive role to do this. He is going to do it himself. And I think you can be absolutely assured that he is going to turn over every stone and drive this with real pace and vigor over the coming months. -------------------------------------------------------------------------------- John Hirjee, Deutsche Bank - Analyst [4] -------------------------------------------------------------------------------- All right. Thank you, David. I guess then in terms of your balance sheet where, as you pointed out, the market is concerned about the leverage position. Andrew, in terms of addressing the debt, what other measures are you looking at in terms of trying to address the debt burden in this bearish oil market view? -------------------------------------------------------------------------------- Andrew Seaton, Santos Ltd. - CFO [5] -------------------------------------------------------------------------------- John, clearly there is a couple of different forces at work here. The oil price is putting a lot of pressure on our share price, given our balance sheet position. We are very leveraged to the oil price, because we are carrying a peak net debt given our recent heavy CapEx phase for building our LNG portfolio. I guess the points are we are investment grade credit rated. We have put in place a strong liquidity position, so that is not an issue for us. Operationally, the business is doing very well. We've talked to our CapEx cuts. We've talked to our OpEx cuts. We're reducing headcount. So, really, what we have been focused on is driving the business hard in the current environment, and that is what we continue to be focused on. Obviously, the strategic review is what is going to address the share price performance and it's going to look at all options for increasing shareholder value at this time. -------------------------------------------------------------------------------- John Hirjee, Deutsche Bank - Analyst [6] -------------------------------------------------------------------------------- Okay. And in terms of GLNG then, broadly, the timetable for bringing on Train 2, if I recall, there is a longer period of time to ramp that up. How is that scope looking in terms of that? Is it still likely to take that amount of time, or do you think that there is possibility of bringing that accelerated ramp up, if you like? -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [7] -------------------------------------------------------------------------------- Yes. It's a good question, John. So, as I said, we are going to -- right from the get-go in 2011, we said that Train 2 will be ready for startup at the end of 2015, and we are going to achieve that. So that is the first piece of news. And the train itself is in a very good shape, if you walk through it as I did last week. It is well advanced and it frankly speaking has been helped by the learnings we have had from Train 1. So it is very well advanced and I'm very confident it is going to be done on time and also perform very well. I'm not going to change the ramp up guidance today. We've always said that it will take two to three years to fully ramp up that second train. I'm not going to adjust that today. But what I am prepared to say is that everyone knows that Fairview field is performing exceptionally well. That absolutely continues. But what we are getting increasingly confident about is the performance of Roma, and that is why we continue to invest with the Roma 2B project, as we call it, and others in the Roma field. It is continuing to perform very well. So, while I'm not going to change the guidance, I do have real confidence, and that's building, that we will be able to exceed that guidance and do better than that over the next two to three years, as we ramp up that second train. -------------------------------------------------------------------------------- John Hirjee, Deutsche Bank - Analyst [8] -------------------------------------------------------------------------------- All right. Thank you, David and Andrew. Thanks very much. All the best. -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [9] -------------------------------------------------------------------------------- Pleasure, John. Thank you. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Dale Koenders, Citigroup. -------------------------------------------------------------------------------- Dale Koenders, Citigroup - Analyst [11] -------------------------------------------------------------------------------- Hi, guys. I was just wondering, in terms of the operating cost savings that you've delivered, it seems to be tracking ahead of schedule and definitely ahead of guidance. Just wondering why the full-year cost guidance hasn't been perhaps reduced down. -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [12] -------------------------------------------------------------------------------- Yes. I will let Andrew answer that but, Dale, the key thing here is we started this drive last November and we have been going at it hard right from the get-go. And that is why you are seeing a good performance in the first half. I will let Andrew answer the more financial question, but the tone of this is very much that we have been driving this extremely hard and we are going to continue to drive this, and we've got a good head start on it. -------------------------------------------------------------------------------- Andrew Seaton, Santos Ltd. - CFO [13] -------------------------------------------------------------------------------- Then, Dale, specifically to the guidance, so clearly the full-year guidance is above our current run rate for the first six months, and the reason for that is that GLNG will start up in the second half. And so what you've got then is a full loading of GLNG costs coming into the P&L but a ramp up in production. So on a dollar per barrel basis, obviously GLNG will be, in the immediate term, higher cost than the rest of our portfolio as it ramps up to full sustained production. -------------------------------------------------------------------------------- Dale Koenders, Citigroup - Analyst [14] -------------------------------------------------------------------------------- Okay. And then secondly, you have obviously run through a lot of examples where you are making some fantastic cost savings on contractors, also the cost of doing work for Roma wells, and gathering down 10% to 15% year on year. Is the CapEx guidance and operating guidance set for GLNG one/two years ago still the right numbers to be using then, or is there downside to those numbers? -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [15] -------------------------------------------------------------------------------- Our guidance right now is first of all we will complete the project for $18.5b. So that is the first thing. And by that I mean complete to the end of the second train, actually producing its first LNG. In addition, we've said that our sustaining capital will average AUD900m -- this is gross -- for the first five years. Now, we did bring that down by 10% in April this year, and I'm holding the AUD900m guidance right now. That is an average over that five-year period. Now, clearly, what you see in here is the teams are frankly really performing. They are really knocking costs out, and we have shown you some examples. There are many more we could have shown you. But I'm not going to change that guidance at this time, but obviously, clearly, they are working to absolutely minimize the sustaining CapEx, maximize the gas flow from it. The other thing I think you should be aware of, in GLNG we have designed it in such a way that it can be operated at lower cost. So there's fiber optic to all the wells. We have 100 wells per operator. Everything is controlled centrally from Brisbane. The plant's controlled on the island, obviously. But we really have designed the system to be a low cost operating system, and so we are very, very focused on this issue going forward. -------------------------------------------------------------------------------- Dale Koenders, Citigroup - Analyst [16] -------------------------------------------------------------------------------- I guess the disconnect that we see, and it is not only GLNG but also APLNG, is discussions of cost out savings that were set perhaps 12 months ago, and before we really saw cost out in the industry which should have been on top of those cost savings, becoming more efficient and drilling wells quicker, pad drilling, etc., and I would have thought that meant that there is further opportunity to reduce costs. However, I guess if there isn't further opportunity, it almost indicates there's been overruns in other areas. I'm just trying to understand (multiple speakers). -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [17] -------------------------------------------------------------------------------- Certainly not in our case. As we have shown here, we have had massive efficiency gains. I don't want to give the impression that this is just because we are driving cost out of our contractors or whatever either. What we are doing is we are redesigning some of our equipment. We are being smarter in the way we are doing it. We are being innovative in the way it has been done. So it is not just -- those fundamental changes in our cost base are happening here through design and also through execution as we go forward. So I'm not going to promise that I'm going to lower the AUD900m. That would be incorrect of me to do. But clearly, that is what we're driving on going forward, and I've given you some pointers that suggest that might be possible in the future. -------------------------------------------------------------------------------- Dale Koenders, Citigroup - Analyst [18] -------------------------------------------------------------------------------- Okay. Thank you. -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [19] -------------------------------------------------------------------------------- Dale, thank you very much. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Kirit Hira, Macquarie. -------------------------------------------------------------------------------- Kirit Hira, Macquarie - Analyst [21] -------------------------------------------------------------------------------- Morning, David and Andrew. Listen, just a couple of questions regarding again CapEx, probably more so the business level CapEx, AUD1.2b next year. Given, I guess, the cost reductions that you have pointed towards in terms of contractor savings, just trying to understand the split there between I guess maintenance and growth. You did refer to the fact that you are not investing in, I guess, growth that doesn't make sense based on current oil prices. Just trying to understand what the split is of, I guess, that investment that does make sense at oil prices today. -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [22] -------------------------------------------------------------------------------- Yes. So clearly, as we bring on our GLNG system Trains 1 and 2, we are going to see growth next year. What we are doing in that CapEx guidance is making sure that the CapEx we are spending next year, which Andrew has indicated will be around AUD1.2b, is sufficient to deliver all of this system, it's sufficient to execute our existing projects play. It's also sufficient to do things like continue to progress the AAL project in Indonesia. It does have some money included in there to allow us to continue to do some exploration, albeit I have said that we are going to focus on exploration that's much closer to the infrastructure rather than drilling the big expensive deep wells. That is for next year. So we have -- what we have done is we've sought to balance making sure that we deliver on all our promises, we do deliver the growth that we promised through GLNG, while preserving capital and also preserving our businesses, preserving our leases, preserving all our operational positions. But we have pulled back from some of the perhaps more expensive and perhaps more risky capital ventures, particularly with, say, exploration deep water wells, which are frankly just going to be very difficult for us next year and it is not going to be done. -------------------------------------------------------------------------------- Kirit Hira, Macquarie - Analyst [23] -------------------------------------------------------------------------------- Okay. Great. Thanks, David. And also a question I guess on the balance sheet. Just looking at I guess the liquidity position going forward, what is the current plans regarding the hybrid in terms of the option to redeem it in 2017? Will that just be refinanced with the existing undrawn facilities that fall due at a later time, or given I guess the current environment, will you look to just continue to keep that in place? I presume you are probably looking to redeem it. -------------------------------------------------------------------------------- Andrew Seaton, Santos Ltd. - CFO [24] -------------------------------------------------------------------------------- Yes, the expectation is that we would redeem that in 2017. -------------------------------------------------------------------------------- Kirit Hira, Macquarie - Analyst [25] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Andrew Seaton, Santos Ltd. - CFO [26] -------------------------------------------------------------------------------- And then refinance it in the appropriate way at the time. -------------------------------------------------------------------------------- Kirit Hira, Macquarie - Analyst [27] -------------------------------------------------------------------------------- Okay. That is all from me, guys. Thanks for that. -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [28] -------------------------------------------------------------------------------- Thanks, Kirit. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Mark Samter, Credit Suisse. -------------------------------------------------------------------------------- Mark Samter, Credit Suisse - Analyst [30] -------------------------------------------------------------------------------- Yes. Morning, guys. I guess the strategic review is going to answer a lot of the questions we have, so I'll try and avoid playing the pantomime villain on the call and just ask you a couple of really more operational questions, if I can. With GLNG, obviously we know the ramp profile on Train 2. I guess I'm keen to understand if there is a contractual ramp profile on Train 1, if you can give us some guidance there. It is going to be pretty logical if you are a -- [one of the bars], particularly given weak market demand but also given the outlook for spot prices, that you would only lift your contractual obligations. Can you give us any indication if the ramp is a put option by GLNG and just a bit more around Train 1 as well? -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [31] -------------------------------------------------------------------------------- Yes. So just on the -- stepping back, on our Train 2 ramp profile, our contracts cater for a ramp over two to three years. That is the first point. On our Train 1 contracting profile, we will seek -- obviously, once the train is operating on plateau, we will run that train on plateau and we will deliver the cargoes into our contracts that that train delivers. And the way we do that is that these cargoes are put in the annual delivery program and once they are in the annual delivery program, then their cargoes which the buyers pick up off the end of the Jetty. The buyers have destination flexibility for these cargoes. It is one of the unique points about our contracts. But they are delivered off the end of the jetty, and basically we put the cargoes into the annual delivery program. Once that is agreed, they become firm and the buyers pick them up. So we are going to run Train 1 basically flat out from as soon as we get it up and running and are comfortable with the system, have done all the performance testing. I'd say Train 2 will ramp up -- I'm hoping it will be faster than two to three years, but I'm not going to change the guidance at this stage, and our contracts cater for that longer ramp up. -------------------------------------------------------------------------------- Mark Samter, Credit Suisse - Analyst [32] -------------------------------------------------------------------------------- So, [DQT] aside, Train 1 will get contract prices on all cargoes as soon as it is at capacity? -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [33] -------------------------------------------------------------------------------- Yes. So what happens here in the early phase of commissioning, exactly the same that happened on Papua New Guinea LNG, you sell commissioning cargoes. And we announced last -- at the investor meeting last November, we announced that we'd sold 13 commissioning cargoes. We are now in the process of selling more commissioning cargoes. So you sell commissioning cargoes up to the point where you say the train is running, we are confident with the delivery, and then you go onto the contracted quantities in the annual delivery program and then you are off under the contracts, at full contract prices, obviously. -------------------------------------------------------------------------------- Mark Samter, Credit Suisse - Analyst [34] -------------------------------------------------------------------------------- Right. Okay. Thank you. And just one other question, about the free cash flow positive oil price on page 13, just to confirm that number is obviously pre any repayment on the capital of debt and any cash dividend, if you start paying cash dividend again, and obviously any ex growth CapEx. It is pre all those factors? -------------------------------------------------------------------------------- Andrew Seaton, Santos Ltd. - CFO [35] -------------------------------------------------------------------------------- Yes, that is right, Mark. It is a free cash flow which is after interest, it's after tax, but it's before principal repayment on debt or cash dividend. That is right. -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [36] -------------------------------------------------------------------------------- Mark, it is after interest. I think you included interest in your short list. It's after interest. -------------------------------------------------------------------------------- Mark Samter, Credit Suisse - Analyst [37] -------------------------------------------------------------------------------- No, sorry. Just capital repayment on debt, yes. No, it is after interest. Got that. Yes. And then just maybe one question was the dividends being discussed. Can you talk us through the thinking of -- it is being fully underwritten so you get the cash back, the thinking behind cutting it versus first half 2014, where obviously from a cash perspective it would have made no difference if it had stayed at the AUD0.20? -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [38] -------------------------------------------------------------------------------- This is obviously a balance. In the light of the lower oil price environment, it is not something that you can pretend isn't there. It is there. The Board's elected to maintain a cautious approach. That's one that I fully support. And it has brought the dividend -- the first-half dividend down by AUD0.05. I think that's entirely appropriate in the situation in which we find ourselves. And as a company, and we've said it many times before, we'll always aim to balance shareholder returns, the operational needs of the business, but right now we've got to reflect the fact that the oil price has come down and therefore the Board is responding correctly, I think, and lower the dividend. -------------------------------------------------------------------------------- Mark Samter, Credit Suisse - Analyst [39] -------------------------------------------------------------------------------- Okay. Perfect. Thanks for that, guys. -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [40] -------------------------------------------------------------------------------- Mark, thank you very much. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- Nik Burns, UBS. -------------------------------------------------------------------------------- Nik Burns, UBS - Analyst [42] -------------------------------------------------------------------------------- Thank you. Look, I'll risk another strategic review question, if I can. I'm sure I won't get much of an answer on it, but just look -- -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [43] -------------------------------------------------------------------------------- No problem. -------------------------------------------------------------------------------- Nik Burns, UBS - Analyst [44] -------------------------------------------------------------------------------- I'm just wondering, in terms of any timeframe in place, is there an expectation that we might have the outcomes of the strategic review by, say, your investor briefing in November? -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [45] -------------------------------------------------------------------------------- Well, you are right, Nik. I'm not going to set any timeframe on the strategic review. It is being led by the Chairman in his executive role. I can assure that you that Peter will give it his full vigor and he is going to drive this very hard. I know that. And we will support him. It's the right thing to do at the right time. We need to look at all options. We have had some people approaching us. No doubt there will be others who will now do, so we've announced this. But we are looking at absolutely all options going forward, and this is very much in the executive hands of Peter and I will do my best to support him. But clearly, with the falling oil price and the continuing suppression of our share price, we do want to get on with it. It is not something that will lie fallow at all. It is going to be driven hard. But I'm not going to give a -- I'm not in any way tie Peter's hands to a timetable. That would be totally inappropriate. -------------------------------------------------------------------------------- Nik Burns, UBS - Analyst [46] -------------------------------------------------------------------------------- Sure. And previously you've made a commitment to protect your investment grade credit rating, and you've said here all options are on the table. Can we infer from that that one of the things that may be looked at is that level of commitment and whether maybe a decision will be to maybe slip below investment grade for a short period of time as part of this review? -------------------------------------------------------------------------------- Andrew Seaton, Santos Ltd. - CFO [47] -------------------------------------------------------------------------------- Nik, I guess the important point to make here is that we have consistently said that maintaining the credit rating has been a key driver for us. And our actions to date support the intention, whether it is CapEx cuts, OpEx cuts, headcount reductions, right-sizing the business, adding additional liquidity facilities. So all these things we have done have been to make the business robust in a low oil price environment and support the rating. Now, I think the strategic review will look at all aspects of the business, including the balance sheet. -------------------------------------------------------------------------------- Nik Burns, UBS - Analyst [48] -------------------------------------------------------------------------------- Okay. Fair enough. Just a question on CapEx as well, if I can. So, first-half CapEx was AUD845m. You've maintained your AUD2b guidance for the full year. That obviously implies AUD1.2b, second half. I guess the expectation has been that maybe with GLNG coming -- getting close to starting up, maybe CapEx there will lighten. Can you give any color or granularity on why CapEx in the second half is going to be higher than first half? And given also the fact that you're talking about -- if that is correct and you've got AUD1.2b in the second half 2015 and then AUD1.2b full year 2016, it seems like quite a strange shape, if you like, for CapEx going forward. -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [49] -------------------------------------------------------------------------------- Yes. I think it's a good observation. Look, I'm driving the business extremely hard to bring our CapEx down without in any way reducing the quality of the business, losing any shareholder value, and while doing it in a way that preserves options. So you are quite correct. We will be looking very hard at the second half and seeing what we can do to bring our CapEx down, but it is not with a view of deferring it into next year or any such nonsense. It's with a view to genuinely reducing our CapEx levels. -------------------------------------------------------------------------------- Andrew Seaton, Santos Ltd. - CFO [50] -------------------------------------------------------------------------------- But, Nik, perhaps I could add, CapEx in the second half will be a bit higher in areas like -- I will give one example, and that is the Cooper Basin, where we've drilled a bunch of wells in the first six months of the year but we haven't fracked those wells and completed them. So the work program now is we have already started now fracking those wells. So we will see some increased costs in the Cooper, but just as the natural part of this development goes on. Another example David mentioned, Roma West Phase 2B. We've sanctioned that project, so that will now ramp up a bit in the second half. But all CapEx is being scrutinized. There's some swings and roundabouts in the portfolio, but we're confident with the guidance of AUD2b this year and the AUD1.2b next year I think is appropriate. -------------------------------------------------------------------------------- Nik Burns, UBS - Analyst [51] -------------------------------------------------------------------------------- Okay. Great. Thanks, guys. -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [52] -------------------------------------------------------------------------------- Thanks, Nik. Thank you. Are there any more questions? -------------------------------------------------------------------------------- Operator [53] -------------------------------------------------------------------------------- Stuart Baker, Morgan Stanley. -------------------------------------------------------------------------------- Stuart Baker, Morgan Stanley - Analyst [54] -------------------------------------------------------------------------------- Good morning, gentlemen. Just a little bit more on the CapEx, the figure there for 2016. I just wonder if you could give us some guidance as to what the shape of that figure might look like in the outer years, 2017, 2018, 2019. Obviously you've got learning effects in GLNG. And just wondering, if things really do get worse and worse and worse, what would be a bedrock type CapEx figure that you could get down to that allows the Company to operate safely and really maintain its assets, if you like? For example, could you get that figure down to AUD1b, AUD800m, AUD600m? What could we think about if oil prices go to $35/$40? -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [55] -------------------------------------------------------------------------------- Yes. Couple of things. Of course, in the event of oil prices continuing to fall, obviously costs are going to continue to come out of the system. So with that said, you can rest assured we will run the business safely, we will make sure we deliver on our promises in a low price world, and we'll continue to drive costs out. It's a little hard to give a firm number, I think, but I would expect it to be well below EUR1.2b if we were in that situation. But maybe Andrew can add some more intelligent color. -------------------------------------------------------------------------------- Andrew Seaton, Santos Ltd. - CFO [56] -------------------------------------------------------------------------------- I think that is right, David. Obviously, we run our portfolio with a range of different scenarios, and there are scenarios where you continue to cut the business hard in the out years, given a low oil price environment. I think you are painting a picture of a very low oil price moving forward. I think the strategic review also will have a bearing on what the makeup of our portfolio looks like in those out years. So, very difficult to speculate. I suppose also you'd expect if the oil price is going to be low, the currency would probably come down with it, so giving some protection to our cash flows. So, complex question, Nik. I think David answered it right. Sorry, Stuart. I think David answered in the right way, in saying that you could take more CapEx out. We still have some discretionary CapEx in the budget next year, examples being appraisal on AAL, some additional drilling in our gas assets in Indonesia as well, still funding exploration and that sort of thing, which you'd look to cut further. -------------------------------------------------------------------------------- Stuart Baker, Morgan Stanley - Analyst [57] -------------------------------------------------------------------------------- Right. Okay. Thanks very much. -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [58] -------------------------------------------------------------------------------- Thank you very much, Stuart. -------------------------------------------------------------------------------- Stuart Baker, Morgan Stanley - Analyst [59] -------------------------------------------------------------------------------- All the best then on the strategic review. Hope it goes well. Thank you. -------------------------------------------------------------------------------- David Knox, Santos Ltd. - MD and CEO [60] -------------------------------------------------------------------------------- Thank you. That is going to be led by Peter. If that is our last question, I'd like to thank everybody for joining us this morning. Thank you very much indeed, and hand back to Kevin.
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