Gallagher on the right track

NEW Santos CEO Kevin Gallagher is following the same playbook that brought Clough back from the brink by streamlining the senior management team, and by focusing on profitability instead of growth he just might pull off this herculean task, putting the oiler in more favourable light to its disgruntled investors.
Gallagher on the right track Gallagher on the right track Gallagher on the right track Gallagher on the right track Gallagher on the right track

Chinese investors are elbowing each other out of the way to get a piece of the South Australian oiler with an LNG megaproject with cargoes heading to Asia and an asset base many of its local peers would kill for.

The Adelaide-based oiler announced last month that Chinese player ENN Group would snap up Hony Capital's 11.7% stake in the Adelaide-based oiler in a move described by one analyst as "corporate Chinese checkers".

Other investors, however, still feel jilted by Santos' past tendency to spend like a drunken sailor in a dogged pursuit of getting Gladstone LNG off the ground independent of any collaboration with any of Queensland's other LNG megaproject proponents, potentially saving millions.

This morning, Gallagher pointed to a new horizon.

And it wasn't so much the new executive team he announced - which was largely the same bar the omission of vice presidents James Baulderstone and GLNG lead Trevor Brown, tipped by some to be previous CEO David Knox's successor - but the direction in which he's heading.

"The appointment of the ‘Excom' [executive team] is a key step in establishing a new operating model for Santos that is focused on both lifting productivity and driving long-term value for shareholders in a low oil price environment," Gallagher said this morning.

"The new model involves a move away from geographic based business units to an asset focused model with strong technical capabilities in our primary business of exploration, development and production of oil and natural gas both onshore and offshore.

"The transition to the new model will be an orderly process over the next few months, consistent with our commitment to safe sustainable development and operations.

"Corporate functions will be consolidated to further reduce costs and improve effectiveness. We will manage our asset portfolio in a manner which delivers value to Santos shareholders."

Santos announced last month that Vince Santostefano, who was Woodside Petroleum's chief operating officer until being replaced by Mike Utsler at the end of 2013 and who also worked for ExxonMobil's Australian arm, would join the team along with management consultant Angus Jaffray, who established Boston Consulting Group's Perth office before joining Azure Capital's consultancy.

Santostefano will be Santos' COO, taking charge of the crucial role of the profit and loss of all the company's operated producing assets; while Jaffray is EVP strategy and corporate services.

The others in the list announced this morning are Bill Ovenden (VP exploration, to develop and execute a targeted exploration strategy); Brett Woods (VP development, to deliver projects, sustain capital work programs and non-operated assets) and John Anderson (executive VP commercial and business development).

Chief financial officer Andrew Seaton, who has partly been blamed for the company's malaise, has kept his job.

"Some of the steps Gallagher took at Clough were to simplify and streamline the senior management team and consolidate office space to deliver cost savings and reduce corporate overheads; and I expect this is the first step of him doing something similar at Santos," Citigroup's Dale Koenders told Energy News this morning.

"It's a step to right-size management to shift away from a focus on growth to a focus on profitability."

Previously Santos used to harp on about its huge contingent resource base and the first wave of growth being delivering PNG LNG and GLNG and the opportunities to re-invest the cash flows from those assets into other assets like the Gunnedah CSG asset, the potential for backfill gas at Darwin LNG and Crown-Lasseter in the Browse Basin, plus other expansion options.

Now it's a different story.

"The focus is no longer on delivering those assets but about maximising the profitability of the assets they currently have or are shifting into operation," Koenders said.

The reality is that investors in the oil and gas world - particularly at Santos, whose market capitalisation this morning stood at about $7.13 billion with a share price of $4.02, down significantly from its 52-week high of $7.95 on May 7 last year - aren't looking for growth right now, but surviving the balance sheet.

Seaton talked during Santos' full-year results briefing in February about being cash flow break-even at $47/bbl for all capital expenditure and dividends as they sold Kipper in 2016, but with oil bouncing between $30 and 40/bbl, and Santos' gearing is at 38%, analysts fear it's unsustainable.

While spending comes down with GLNG delivered, the question remains about how Gallagher brings debt down to a manageable position.

That's the big worry with Santos, and what Gallagher must address.

Even sceptical analysts agree that Gallagher has an amazing asset set ahead of him, and if he can improve the profitability of the business he'll look like a champion.

Koenders said Santos had been "myopically focused on delivering GLNG, perhaps at the expense of capital discipline and cost control", but believes the new CEO now has a "fantastic opportunity" to correct those issues.

"By doing so he will improve the profitability of the company to create value for shareholders and to create a more robust business," the analyst said.

"That's exactly what's needed for Santos in this low oil price environment."