Santos announced it expects to recognise a non-cash impairment charge in the range of US$700-800 million before tax (US$490-560 million after tax) in the 2020 half-year results to be released on 20 August 2020. The impairment charge is due to revised oil price assumptions resulting from the effects of the COVID-19 pandemic on energy market demand fundamentals.
As a result of these revised oil price assumptions, Santos will recognise non-cash impairments of GLNG of US$640-700 million before tax and exploration assets (primarily in the Cooper and Amadeus Basins) of US$60-100 million before tax in the half-year results. There is no impact on any of Santos’ reserves.
Santos sets its long-term oil price assumptions by referencing, as a guide, the average oil price assumptions of a number of independent energy analysts. Using this approach, Santos has reduced its long-term price assumption by over 10% while also forecasting a slower recovery in the short to medium term.
The impairment charge is forecast to increase Santos’ gearing by approx. 1.5 per cent. Santos’ debt covenants have sufficient headroom and are not under threat at current oil prices for a number of years.
Santos Managing Director and Chief Executive Office Kevin Gallagher said:
'Since 2016, Santos has implemented a disciplined operating model that is focussed on generating free cash flow through the oil price cycle.'
'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.'
'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.'
'Santos is well positioned to leverage our growth opportunities when business conditions improve,' Mr Gallagher said.
The impairment charge is a non-cash item with no impact on EBITDAX or cash flow, it will be excluded from underlying earnings and is subject to finalisation of the half-year accounts, auditor processes and Board approval.
Oil prices used in the assessment of asset carrying values
Santos has revised its oil price assumptions since the last assessment of asset carrying values at 31 December 2019. There is a reduction over the near-term and a revised long-term Brent crude price assumption of US$62.50 per barrel (2020 real) from 2024.