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What Santos’s production update means for investors

Investors, much like deer, are often easily spooked by unexpected news. They also often have a herd mentality that can send share prices tumbling when they sense a threat. This seemed to be the case for shares in Santos (ASX: STO) last week which were sent tumbling 3.6% on the company’s mixed second-quarter update and revised full-year guidance.

So was the fall justified, or was it a case of jumpy investors? Here is what Santos’s guidance means for investors:

Lower production

The worst news presented by Santos was a decline in second quarter production, down by 5% year-on-year to 12.4 million barrels of oil equivalent (mmobe). The lower production is mostly the result of natural field declines, particularly in the Cooper Basin which had 15% lower production than second quarter 2012, as well as declines in the company’s Denison and Bangladesh fields.

The net result will see full year production drop to between 52-55 mmobe, down from the previous guidance of 53-57 mmobe. This is still likely to be up on the 52.1 mmobe produced in 2012.

Higher energy prices

The upshot for the quarter was higher energy prices received on both oil and gas products sold. Sales revenue was up 8%, or $58 million, over last year. The average gas price received for the quarter was $5.61 per Gigajoule (GJ); a record and 16% higher year on year.

Higher oil production, up 27% over the first quarter, wouldn’t be a negative going forward either, particularly with the recent rise in oil prices which have been pushed to their highest level in 16 months on support from a revived US economy.

Long-term growth

Santos has had a number of positive milestones in the last quarter and projects set to deliver long-term growth seem to have been overlooked by some investors. These include the 90% complete PNG LNG, which Santos is developing in conjunction with Oil Search (ASX: OSH), GLNG which is 60% complete and a new agreement with Drillsearch Energy (ASX: DLS) set to increase its exposure to the Cooper Basin region.

The only real concern was the highlighted rise in production costs which are expected to be at the higher end of the $630-$660 million range, an issue investors will be keeping an eye on going forward.

Foolish takeaway

Despite the lower production guidance, the results look positive for Santos. Shares in the company have gained over 23% this year compared to the 5.6% rise in the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) and it’s hard to see any major unexpected surprises being announced next month when the company releases its half year results.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.

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