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Santos Ltd (ASX:STO) reinstates dividends as profits increase

Oil and gas company Santos Ltd (ASX: STO) reported a half-year underlying profit of US$217 million today – almost double that of the previous corresponding period and reflecting the run of oil and gas prices over the timeframe.

Santos announced its EBITDAX rose 23% to US$883 million with free cash flow up 22% and product sales jumping 6%.

Shareholders will be relieved to see the reinstatement of Santos’ interim dividend of US3.5c per share – the first dividend to be paid since March 2016 – a move Santos says “reflects the Board’s confidence” in Santos’ future prospects.

Santos shares are up 8.3% to $6.79 at the time of writing.

Santos yesterday announced it would acquire 100% of Quadrant Energy for US$2.15 billion plus royalty payments related to future Bedout Basin project revenue – funded via new debt facilities and cash resources.

Quadrant is owned by several notable shareholders, including Macquarie Capital, with a 21% stake, a 13.2% stake by Wesfarmers Ltd (ASX: WES) and 48% by Brookfield Asset Management and partners.

Quadrant’s natural gas assets include significant portfolio overlap with Santos, giving the company the chance to “realise material combination synergies” estimated at between US$30 million to $US$50 million.

While the acquisition will considerably strengthen Santos’ West Australian natural gas assets and offshore operating capability – it’s interesting the likes of Macquarie and Wesfarmers decided to offload their share at this juncture – but there was a solid profit to be collected.

The Quadrant transaction comes soon after Santos rejected a takeover bid from Harbour Energy for $14 billion.

Santos Managing Director and CEO Kevin Gallagher said strong free-cash flow has enabled the company to reduce net debt by 17% and reinstate dividends, but some investors will undoubtedly be concerned about Santos’ remaining net debt of US$2.4 billion as the Quadrant deal factors in.

The newly-committed debt facilities comprise a US$600 million bank term loan facility over five years and a $US600 million two-year bridge facility which will be refinanced on acquisition completion.

But Gallagher said Santos is ahead of targets for its net debt reduction strategy which will give the company a “significantly stronger balance sheet to support our growth strategy”.

Santos Half-year Highlights ($USD)

Underlying profit             $217  million       Up 99%

EBITDAX                             $883 million       Up 23%

Free cash flow                  $367 million        Up 22%

Interim dividend              3.5cps                  Up 3.5cps

Net debt                              $2.4 billion          Down 17%

Elsewhere in the oil and gas space today shares in Oil Search Limited (ASX: OSH) are almost 1% in the red at the time of writing, down to $8.93, two days after its own half-year results presentation revealed total production and sales fell 31% with revenue slipping 18% and NPAT tumbling 39%.

Beach Energy Ltd (ASX: BPT) shares have also been on the decline since the release of its results on August 20 which revealed underlying NPAT was up 86% to $301.5 million with a 90% surge in revenue attributed in part to its Lattice Energy asset integration.

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Motley Fool contributor Carin Pickworth has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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