A founding shareholder in the PNG LNG project, Santos, says it will carry out a ‘full strategic review’ of its operations, after losing more than A$8 billion in market value in the first half of 2015.

Santos’ outgoing CEO, David Knox. Credit: Santos

The news coincides with the resignation of CEO and Managing Director David Knox, who has announced his intention to step down, once a successor is found.

Santos has announced an 82 per cent slump in first-half net profit to around A$37 million because of plunging oil prices and higher exploration costs.

Its share price has fallen 63 per cent over the past 12 months and is at its lowest level in five years.

The firm’s exploration costs increased to A$194 million in the first half of 2015, 90 per cent above the A$102 million reported the previous year.

Despite the massive profit fall, Knox said Santos had responded to lower oil prices quickly and effectively.

Capital expenditure was down 55 per cent from a year ago, and production costs have also been lowered.

More will be done, and the company expects to achieve A$180 million in supply chain savings in the full year, Knox said.

Santos’ chairman, Peter Coates. Credit: Fairfax

Board Chairman Peter Coates will upgrade his role to that of executive chairman and carry out the review.

‘No options will be ruled out from consideration, but neither is any particular option a preferred course at this time,’ Coates said in a statement.

Asset sales

The review opens up the possibility of asset sales, but analysts are divided over which of Santos’ assets may be sold.

Santos has oil, gas and LNG assets across Australia, as well as in Papua New Guinea, Indonesia and Vietnam.

Citigroup’s Dale Koenders told Fairfax Santos would need to sell $2 billion to $3 billion of assets, or raise that amount in new equity, to bring gearing down to a more comfortable 30-35 per cent by 2017.

Credit Suisse analyst Mark Samter has questioned the sense of Santos selling its 13.5% interest in ‘world class’ PNG LNG, which it calculates accounts for 90 per cent of Santos’s free cash flow at $US65 a barrel of oil, but which would be easy to sell.

Santos says it is also looking to its 30 per cent-owned Gladstone LNG project in Queensland for relief, when it begins production later this year.

Oil Search eyes Santos?

Samter’s analysis is underpinned by Oil Search’s announcement that production increases at the PNG LNG project have guided Oil Search to a 49.2 per cent increase in net profit to US$227.5 million for the six months to the end of June.

Oil Search MD Peter Botten

‘The PNG LNG Project performed ahead of expectations during the first half, producing LNG at an annualised rate of approximately 7.1 MTPA, above the nameplate capacity of 6.9 MTPA,’ according to Oil Search Managing Director, Peter Botten.

Botten says Santos has ‘a number of potentially interesting assets’ for Oil Search, according to the Australian Financial Review.

Credit Suisse values Santos’ stake in PNG LNG at about $4 billion, which Botten signalled would be too big for Oil Search to consider by itself.

Botten says Oil Search ‘is well placed to manage the current low oil price cycle, with close to US$1.6 billion of liquidity, a cash operating margin of 75%, very competitive production costs and a focused optimisation process underway, designed to drive costs down further and deliver greater efficiencies across our business.

Peter Botten will be participating in the 2015 Papua New Guinea Advantage Investment Summit in Brisbane today. You can follow Summit proceedings live here.