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Santos share price higher after record Q2 production and strong free cash flow

The Santos Ltd (ASX: STO) share price is pushing higher on Thursday after the release of its quarterly update.

At the time of writing the energy producer’s shares are up 1.5% to $5.55.

How did Santos perform in the second quarter?

According to the release, Santos delivered second quarter production of 20.6 mmboe. This was 15% higher than the prior quarter and a company record.

Management advised that the strong production result was driven by higher domestic gas production in Western Australia, continued strong onshore production, and a higher equity interest in Bayu-Undan following completion of the ConocoPhillips acquisition.

Quarterly sales revenue came in at US$785 million, which was 11% lower than the prior quarter. This was primarily due to lower prices, which was partially offset by higher domestic gas and LNG sales revenues.

First half update.

For the first half of FY 2020, production was up 4% to a record 38.5 mmboe. Management notes that its disciplined operating model continues to drive strong onshore performance, with first half Cooper Basin and Queensland equity gas production up 18% and 5%, respectively.

This ultimately led to half year sales revenue of US$1.7 billion, down 16% on the prior corresponding period.

Pleasingly, despite the sharp decline in prices, Santos is still generating strong free cash flows. It reported US$431 million of free cash flow in the first half.

This left Santos with liquidity of over US$3 billion at the end of the quarter. This comprises US$1.3 billion in cash and US$1.9 billion in committed undrawn debt facilities.

Santos Managing Director and Chief Executive Officer Kevin Gallagher, commented: “Our disciplined, low-cost operating model continues to drive strong performance across our diversified asset portfolio and completion of the ConocoPhillips acquisition in late-May further boosted our production and cash flows.”

Outlook.

Santos has updated its production guidance to 83 mmboe to 88 mmboe and its sales volume guidance to 101 mmboe to 107 mmboe.  

This compares to previous guidance of 81 mmboe to 89 mmboe and 101 mmboe to 109 mmboe, respectively.

Santos’ guidance includes the ConocoPhillips acquisition from the completion date of 28 May 2020, when its interest in Bayu-Undan and Darwin LNG increased from 11.5% to 68.4%.

Management advised that the company is targeting a FY 2020 free cash flow breakeven oil price of US$25 per barrel. It notes that approximately 60% of production volumes for the remainder of 2020 are either fixed-price domestic gas contracts or oil hedged at an average floor price of US$38 per barrel.

Mr Gallagher spoke positively about the future. He said: “By maintaining our sustaining activities, production levels from our core assets are expected to remain relatively steady for the next five or six years, allowing us to continue to progress our major capital projects while maintaining capital discipline and flexibility in commitment timing.”

As COVID-19 and the lower oil price continue to challenge us, we have remained resilient and kept production going, meaning our revenues have continued to flow. Our balance sheet is strong and we remain well positioned to leverage our growth opportunities when business conditions improve,” Mr Gallagher concluded.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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