Santos to Chase M&A Despite QGC Setback

MELBOURNE Feb. 22, 2007 (Dow Jones Newswires)

Oil and gas producer Santos Ltd. (STO.AU) said Thursday it will keep on hunting for acquisitions to boost production, despite the failure of its last two bids.

Santos was last year outbid for the Cooper Basin assets of Delhi Petroleum and this week abandoned a A$960 million bid for coal seam gas producer Queensland Gas Co. Ltd. (QGC.AU) after the competition regulator opposed the deal.

But Managing Director John Ellice-Flint said the company will not be shying away from chasing growth through acquisition, despite the setbacks.

"It is part of our arsenal and we will definitely keep looking at acquisitions," he told Dow Jones Newswires in an interview.

The Adelaide-based company has had a tough 12 months; missing out on Delhi and QGC, slashing reserves at its Jeruk field in Indonesia and being exposed to an as-yet unknown liability from mudflow caused by a well on the Island of Java.

Santos Thursday posted a 16% drop in full year net profit to A$643.4 million from A$762.1 million in 2005, well below analyst forecasts, although much of the discrepancy was due to the accounting treatment of depreciation on future spending.

Ellice-Flint pointed out the company also posted record production of 61 million barrels of oil equivalent and managed costs in an overheated petroleum industry.

"You have got record performance and there (are) issues that didn't go our way, so you have got to take the good with the bad and keep going," he said.

"Our strategy is intact and we are continuing to move ahead."

Santos has lifted its provision for liabilities relating to the mudflow from the Banjar Panji well to A$89 million from A$24 million, and has already received A$22 million in payouts from its insurer over the incident.

The hot mud flowing from the well has displaced 11,000 people and experts' attempts to stem the flow have so far failed.

The company concedes the final costs from the disastrous well may be significantly different from the current estimate, and Deutsche Bank energy analyst John Hirjee said it remains a serious issue.

"It overhangs the stock - investors are concerned about what potential exposure there is," he said.

Perhaps an even bigger challenge for Santos is to find new reserves to replace its declining flagship Cooper Basin gas operations.

It expects total production for the next two years will be in line with current rates, at between 59 million and 61 million barrels of oil equivalent.

One source of potential growth is the company's Cooper oil development program, which it believes can lift oil production from the Cooper Basin from under 10,000 barrels a day to more than 30,000 barrels a day by 2010.

The company is selling its U.S. assets, which will reduce production, but is also moving to build up operations in Vietnam and Indonesia.

Santos boosted its coal seam gas production 65% in 2006, but the failure of the QGC deal means it will miss out on making another step shift in this fast growing industry.

One key growth prospect is a possible second liquefied natural gas train at the Darwin LNG joint venture, which would process gas from Santos' fields in the Timor Sea.

ABN Amro analyst Aiden Bradley said Santos is under pressure to find projects that can make a meaningful contribution from around 2010.

"The Cooper (gas) decline really starts to kick in then," he said.

"The Cooper oil will be a contributor, but you really need to see something a bit more material than that, and that is where a second train at Darwin would be crucial."

A second train is not a certainty, he said, as Santos' gas has a high carbon dioxide content and no liquids, handicapping it against alternatives now appearing for Darwin, like the Woodside Petroleum Ltd. (WPL.AU) led Greater Sunrise field.

Bradley said the profit result stacked up when you backed out the depreciation impacts.

Sales revenue for the year climbed 12% to A$2.77 billion from A$2.46 billion in 2005.

Santos posted a final dividend of 20 cents per share, taking the full year dividend to 40 cents per share, up from 38 cents in 2005.

Shares in the company slumped 3.3% on the result, but recovered to close Thursday down just 0.3% at A$10.02.

Copyright (c) 2007 Dow Jones & Company, Inc.

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