GLADSTONE PRODUCES FIRST GAS BUT COSTS SANTOS $1 BILLION

SANTOS' (ASX: STO) Gladstone liquid natural gas plant has cost the company US$1.05 billion, just months after it made its first shipment of gas.

The energy company reported its first-half results today, announcing a $1.1 billion net loss, largely led by the GLNG write-off, but also affected by low oil and gas prices, which pushed the company to an underlying net loss of US$5 million after tax.

The positive impact of a 32 per cent increase in sales volumes was more than offset by lower oil and oil-linked LNG prices, as a result sales revenue decreased by 6 per cent to US$1.2 billion.

The average realised oil price fell 29 per cent to US$42.79 per barrel, while the average LNG price was 42 per cent lower at US$5.70/mmbtu.

Managing director and CEO, Kevin Gallagher, who started with the company in February, says, Santos' goal is a breakeven point of between US$35-$40 per barrel.

"We have made good progress in the first half towards this goal and are forecasting a free cash flow breakeven oil price of US$43.50 per barrel for 2016, down from US$47 per barrel," he says.

If Santos can achieve those breakeven prices, it bodes well for the rest of the year, as the WTI Crude Oil price has improved to US$46.79 per barrel today.

The company will establish a new operating model to lift productivity in the low oil price environment, driven by a new executive team, Excom.

"Our progress is also evidenced by record production and significant cost reductions achieved in the first half: unit upstream production costs were down by 15 per cent to US$8.80/boe and capital expenditure down by 58% to US$283 million."

Production was up 10 per cent to a record 31.1 mmboe as a result of the start-up of GLNG train 1 in September 2015 and train 2 in May 2016. GLNG produced 1.96 million tonnes of LNG in the first half and shipped 32 cargoes, a total of 39 since start-up. The facility has capacity to produce 7.8 million tonnes of LNG annually at peak production.

The LNG plant, on Curtis Island off the coast of Gladstone, cost US$18.5 billion The project is led by Santos, in partnership with PETRONAS from Malaysia, Total from France and KOGAS from South Korea.

Guidance for the remainder of 2016 Is for between 57-63 mmboe production, with 76-83 mmboe of sales. Upstream production costs will be US$9-10/boe produced, depreciation costs will be US$800 million and capital expenditure US$750 million.

Gallagher says there are three clear goals for the rest of the year and beyond: implement the new operating model, drive down operating costs, and reduce debt.

In the first half of 2016, the company reduced its net debt to US$4.5 billion, with free cash flow breakeven oil price reduced to US$43.50 per barrel, down from US$47 per barrel.

The company will not pay a dividend in the first half.

STO is trading at $4.95 per share this morning, up 0.20 per cent.