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Bright future for oil and gas giant but costs a big concern

Energy may be key to the future of Australia’s economy, but 2012 saw plunging profit for oil and gas producer Santos Limited (ASX: STO). However, the picture is better than the initial numbers suggest.

The company’s full year results, released this morning, saw revenue rise 18% to $3.3 billion and net profit decline 31% to $519 million. This decline in profit is attributable to a lack of asset sales (in 2011, asset sales significantly boosted profits). Santos’  underlying profit — which excludes those one-off items — actually rose 34% in 2012 to top $600 million.

Capturing domestic and Asian demand

During the year, the company also initiated Australia’s first commercial production of natural gas from a shale well. Santos already provides 15% of Australia’s natural gas, and its hefty footprint in Asia positions it to be a key supplier to energy-hungry China and Japan.

Santos’ 2012 production came to 52 million barrels of oil equivalent, 10% higher than 2011 levels. The company has said it expects 2013 production to be in the range of 53 to 57 million barrels of oil equivalent. With some $3 billion in cash and more funds available in credit, the company is well positioned to continue to grow production.

But costs an ongoing concern

Looking to the future, company management has stated a goal of growing production between 5% and 6% annually, with the ultimate goal of achieving production of 80 to 90 million barrels of oil equivalent by 2020.

While the future appears bright, the rising cost of production in Australia figures as an ongoing concern, with cost controls a key issue not only for Santos but also for Woodside Petroleum (ASX: WPL) and Origin Energy (ASX: ORG), which recently cut jobs and profit forecasts because of cost blowouts.

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