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Debt-laden Santos spinning off assets

AAP logoAAP 7/12/2016 Prashant Mehra

Oil and gas producer Santos hopes to restore its fortunes by spinning off second-tier assets into a separate business and sharply reducing debt over the the next three years.

The operator of the Gladstone liquefied natural gas terminal in Queensland, Santos has struggled with debt as a prolonged slump in oil prices coincided with the $18.5 billion project coming online.

The company made a $US1.1 billion loss in the first half of calendar 2016 after taking a $US1.5 billion impairment against the value of the LNG project.

Chief executive Kevin Gallagher told investors on Thursday that Santos will streamline its business to five long-life natural gas assets - the Gladstone LNG terminal, its interests in Papua New Guinea projects, the Cooper Basin and Western Australian gas divisions and its prospective Northern Australian holdings.

All other assets will be spun off into a separate business that will be headed by former AWE chief executive Bruce Clement.

These will include its controversial coal seam gas project in NSW, which has long faced protests from environmental groups, a range of other ageing fields across Australia, as well as interests in Indonesia and Vietnam.

Santos said the new business would be run with a low-cost mindset, and left open the option of divesting these assets in the future.

The restructuring plan comes days after rival Origin Energy, which operates the neighbouring APLNG project in Queensland, also outlined plans to spin-off and divest its conventional upstream oil and gas portfolio.

The changes also come amid continuing pressure from investors - including the company's largest shareholder, China's ENN Group - to revise its strategy and cut debt in an effort to improve shareholder value.

Mr Gallagher said Santos aims to reduce current net debt of $US4.3 billion to below $US3 billion by the end of 2019, mainly by improving cash flows and the sale of non-core assets or infrastructure.

The company has already slashed costs to bring down the cash breakeven oil price to $US39 a barrel, from $US47 a barrel at the beginning of 2016, he said.

"I believe this improved operational performance provides a strong foundation for us to implement a new strategy for Santos, where we can focus on growth rather than survival," Mr Gallagher said.

Santos also forecast production of between 55 and 60 million barrels of oil equivalent (boe) in 2017, lower than the current year's 60 to 62 million boe estimate. Sales of between 73 and 80 million boe are expected, down from 81 to 83 million boe in 2016.

RBC Capital Markets analyst Ben Wilson said the 2017 targets were short of his forecasts.

Santos shares were down four cents at $4.32 at 1440 AEDT.

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