The market has downgraded Santos Ltd (ASX: STO) shares following the release of its 2015 Annual Report.
For the year ended 31 December 2015, Santos reported a 20% fall in revenue to $3,294 million and a net loss of $2,698 million, down 189% from a year earlier.
Surprisingly, the oil and gas producer declared a final dividend of 5 cents per share, fully franked.
The profit result was impacted by impairments totalling $3.9 billion, while capital expenditure was cut 54% to $1.7 billion.
Production rose 7% to 57.7 million barrels of oil equivalent (mmboe) but the average realised price fell 48% to US$54 a barrel. Sales revenue followed it lower, falling 20% to $3.2 billion.
The company said falls in the oil price are reflected in today's results announcement, but it was taking steps to lower costs and improve its outlook.
"The actions the company took in 2015 to strengthen its balance sheet and lower its cost base have put Santos in a stronger position to manage through a period of low oil prices," Santos' Chairman, Peter Coates, said. "The company raised $3.5 billion, reduced capital expenditure by 54% below 2014 levels and lowered production costs per barrel by 10%."
With the company meaningfully cutting its capital expenditure in 2015 and lowering its forecast spend to just $1.1 billion, Mr Coates said the company is well placed to meet its obligations.
"With $4.8 billion in cash and committed undrawn debt facilities and no material drawn debt maturities until 2019, Santos is well placed to deal with the short term challenges," he said.
Santos CEO, Kevin Gallagher, said: "My priority now is to assess our operations and put in place the right strategy to ensure that Santos is sustainable in a low oil price environment, while positioning the company to take full advantage of rising commodity prices in the future."
The company maintained 2016 production guidance of between 57 mmboe and 63 mmboe.
Foolish takeaway
According to my best estimate, Santos generated free cash flow, which is essentially the cash left over after paying the bills and investing for growth, of negative $939 million. Therefore, while the company has cash on hand and undrawn debt facilities, it remains a high-risk investment proposition, in my opinion.
