RESULTS FOR ANNOUNCEMENT TO THE MARKET
APPENDIX 4D FOR THE PERIOD ENDED 30 JUNE 2018
2018
US$million
2017US$million
Change
%
Revenue from ordinary activities1,680
1,44916
Statutory Profit/(Loss) from ordinary activities after taxattributable to members
(506)nm
Net Profit/(Loss) for the period attributa ble to members
(506)nm
Interim Dividend Amount per
securityUS cents
Franked amount per
security at 30% tax
US cents
Directors resolved to pay an interim dividend in relation to thehalf-year ended 30 June 2018.
Ordinary securities29 August 2018 is the record date fo r determining entitlementsto the dividend
3.5 3.5
CONTENTS
Half-year Report30 June 2018 Page
Directors’ Report 2
Review and Results of Operations 2
Directors6
Rounding6
Auditor’s Independence Declaration 7
Hal
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-year Financial Report 8
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Consolidated Income Statement 8
Consolidated Statement of
Comprehensive Incom e 9
Consolidated Statement of
Financial Position 10
Consolidated Statement of Cash Flows 11
Consolidated Statement of
Changes in Equity 12
Notes to the Hal
f
-year ConsolidatedFinancial Statements 13
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Directors’ Declaration 30
Independent Au ditor’s Report 31
Appendix 4D continued 33
RESULTS FOR THE PERIOD
2018US$million
Change
Underlying profit
217 99%Product sales 1,680 16%EBITDAX
883 23%Free cash flow
367 22%Interim dividend (UScps) 3.5 3.5cps
Underlying profit, EBITDAX (earnings before interest, tax, depreciation, depletion, exploration,
evaluation and impairment) and free cash flow (operating cash flows less investing cash flows netof acquisitions and disposals) are non-IFRS measures that are presented to provide anunderstanding of the performance of Santos’ operations. The non-IFRS financial information isunaudited however the numbers have been extracted from the financial statements which havebeen subject to review by the Company’s auditor.
ABOUT SANTOS
Santos is an Australian natural gas company. Establishedin 1954, the comp any’s purpose is to provide sustainablereturns for our shareholders by supplying reliable,affordable and cleaner energy to improve the lives ofpeople in Australia and Asia.
Five core long-life natural gas assets sit at the heart of adisciplined, focused strategy to drive sustainableshareholder value: the Cooper Basin; Queensland andNSW; Papua New Guinea; Northern Australia; andWestern Australia. Each of these core assets providestable production, long-term revenue streams andsignificant upside opport unities. As a low-cost, reliable andhigh performance business, we are proud to deliver theeconomic and environmental benefits of natural gas tohomes and businesses throughout Austra lia and Asia.
DIRECTORS’ REP O RT
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DIRECTORS’ REPORT
The Directors present their report together with the consolidated financial report of the consolidated entity, beingSantos Limited (“Santos” or “the Company”) and its controlled entities, for the half-year ended 30 June 2018, and theauditor’s review report thereon.
REVIEW AND RESULTS OF OPERATIONS
Unless otherwise stated, all references to dollars are to US dollars.A review of the results of the operations of the consolidated entity du ring the half-year is as follows:
Summary of results table 2018 2017 Variance
mmboemmboe%
Production volume28.029.5(5)
Sales volume 38.040.1(5)
$million$million
Product sales 1,680 1,44916
EBITDAX
883 71823
Exploration and evaluation expensed (45)
(53)15
Depreciation and dep let ion (328)
(348)6
Net impairment loss (76)
(920)92
Change in future restoration assumptions 9 –100
EBIT
443 (603)173
Net finance costs (108)
(139)22
Taxation (expense)/benefit (231)
236(198)
Net profit/(loss) for the peri od 104 (506)nm
Underlying profit for the period
217 10999
1 EBITDAX (earnings before interest, tax, depreciation, depletion, exploration and evaluation and impairment), EBIT (earnings before interest and tax) and underlying
profit/(loss) are non-IFRS measures that are presented to provide an understanding of the underlying performance of Santos’ operations.2 Underlying profit excludes the impacts of asset acquisitions, disposals and impairments and the impact of hedging. Please refer to page 5 for the reconciliation from
net profit/(loss) to underlying profit/(loss) for the period. The calculation of underlying profit has changed from prior periods, please refer page 5 for further details.Prior period underlying profit has been restated to a like for like basis for comparability. The non-IFRS financial information is unaudited however the numbers havebeen extracted from the financial statements which have been subject to review by the Company’s auditor.
Sales volume
Sales volumes of 38 million barrels of oil equivalent
(mmboe) were 5% lower than the previous ha lf. LowerLNG sales volumes due to a temporary o utage at PNGLNG, following the PNG Highlands earthquake inFebruary 2018, combined with planned maintenance atDarwin LNG, were partially offset by higher CooperBasin oil sales volumes.
Sales revenue
Sales revenue was up 16% compared to the previous
half to $1.7 billion, primari ly due to higher oi l and LNGprices and higher oil sales volumes. The averagerealised oil price was up 38% to US$75/bbl and theaverage realised LNG price rose 24% toUS$8.96/mmBtu.
28.9
30.9
40.9
40.1
38.0
HY14HY15HY16HY17HY18
mmboe
1,727
1,261
1,191
1,449
1,680
HY14HY15HY16HY17HY18
US$million
DIRECTORS’ REP O RT
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Production
Production was 5% lower than the previous half
primarily due to the temporary outage at PNG LNGfollowing the PNG High lands earthquake partially offsetby higher Cooper Basin, Queensland and WesternAustralia gas production.
Review of Operations
Santos’ operations are focused on five core, long-lifenatural gas assets: Cooper Basin, Queensland andNSW, PNG, Northern Australia and WesternAustralia.
Cooper Basin
The Cooper Basin produces natural gas, gas liquids andcrude oil. Gas is sold primarily to domestic retailers,industry and for the prod uct io n of li quefied nat ural gas,while gas liquids and crude oil are sold in domestic andexport markets.
Santos’ strategy in the Cooper Basin is to de liver a low-cost, cash flow positive business by building production,investing in new techn ology to l ower developm ent an dexploration costs, and increasing utilisation ofinfrastructure including the Moomba plant.
Cooper Basin HY18 HY17
Production (mmboe) 7.5 7.1
Sales volume (mmboe) 10.3 10.4
Product sales (US$m) 502 375
Production cost (US$/boe) 8.42 9.72
EBITDAX (US$m) 229 157
Capex (US$m) 108 84
Cooper Basin EBITDAX was $229 million, 46% higher
than the first half of 2017 primarily due to higher salesrevenue impacted by higher oil prices, in addition tolower production costs of US$8.42/boe, down 13%,resulting from cost saving and efficiency initiatives.Santos’ share of Cooper Basin sales gas and ethaneproduction of 29.7 petajoules (PJ) was 4% higher thanthe corresponding period, primarily due to higherdrilling activity and strong production from newlyconnected wells, which more than offset the impact ofplanned maintenance at th e M oomba pl ant.Santos’ share of oil and condensate pro duc tion was 1. 4million and 448,800 barrels respect ively .
Queensland and NSW
The GLNG project in Queensland produces liquefiednatural gas (LNG) for export to global markets fromthe LNG plant at Gladstone. Gas is also sold into thedomestic market. Santos has a 30% interest in GLNG.
The LNG plant has two LNG trains with a combinednameplate capacity of 7.8 mtpa. Production from Train1 commenced in September 2015 and Train 2 in May2016. Feed gas is sourced from GLNG’s upstream fie lds,Santos portfolio gas and third -party suppliers.
The LNG plant produced 2.5 million tonnes in the firsthalf of 2018 and shipped 40 cargoes.
Santos aims to build GLNG gas supply throughupstream development, seek opportunities to extractvalue from existing infrastructure and drive efficienciesto operate at lowest cost.
Queensland and NSW
HY18 HY17
Production (mmboe)
5.95.6
Sales volume (mmboe)
11.0 10.6
Product Sales (US$m)
463 354
Production cost (US$/boe) 6.39 5.95
EBITDAX (US$m)
285 153
Capex (US$m)
11079
Queensland and NSW EBITDAX was $285 millio n, 86%
higher than the first half of 2017. This was a result ofhigher sales revenue reflecting the ramp up of upstreamproduction and higher LN G prices.
Papua New Guinea
Santos’ business in PNG is centred on the PNG LNGproject. Completed in 20 14, PNG LNG produces LNGfor export to global markets, as well as sales gas and gasliquids. Santos has a 13.5% interest in PNG LNG.
The LNG plant near Port Moresby has two L NG trai nswith the combined capacity to produce more than eightmillion tonnes per a nnum. Production from both trainscommenced in 2014.
PNG LNG production and sales in the first half of 2018were significantly impac ted by a severe earthquak e thatstruck the PNG Highlands region in February 2018.PNG LNG was safely shut-in and there were noreleases of hydrocarbons or significant injuries topersonnel. Production recommenced in April andresumed full rates in May.
Santos’ strategy in PNG is to work with its partners toalign interests, and support and participate in backfilland expansion opportunities at PNG LNG. Santosalong with the other PNG LNG parties are indiscussions to build alignment for the proposedconstruction of three additio nal LNG trains at the PNGLNG site. Santos is also in discussions regarding aproposal received for Santos to farm-in to P RL 3 whichcontains the multi- tcf P’nyang field.
25.0
28.3
31.1
29.5
28.0
HY14HY15HY16HY17HY18
mmboe
DIRECTORS’ REP O RT
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PNG HY18 HY17
Production (mmboe) 4.6 6.2
Sales volume (mmboe) 4.1 5.8
Product Sales (US$m) 215 248
Production cost (US$/boe) 6.91 4.32
EBITDAX (US$m) 165 203
Capex (US$m) 15 16
PNG EBITDAX was $165 million, 19% lower than the
first half of 2017.
Northern Australia
Santos’ business in Nort hern Australia is focused on theBayu-Undan/Darwin LNG (DLNG) project. Inoperation since 2006, DLNG produces LNG and gasliquids for export to global markets. Santos has an11.5% interest in DLNG.
The LNG plant near Darwin has a single LNG trai n witha nameplate capacity of 3.7 mtpa. LNG production of1.5 million tonnes in the first half was lower than thecorresponding period, due to a planned one-monthmaintenance shutdown in May 2018.
Santos’ strategy in Northern Australia is to supportplans to progress Darwin LNG backfill, expand thecompany’s acreage footprint and appraise the onshoreMcArthur Basin.
In April 2018, Santos announced that agreement hadbeen reached with our joint venture partners to enterthe front-end engineering and design (FEED) phase forthe development of the Barossa project to backfillDarwin LNG. A final investment decision is targetedtowards the end of 2019. Santos has a 25% interest inBarossa and successful development would extend theoperating life of Darwin LNG for more than 20 years,and more than double Santos’ current production inNorthern Australia.
Northern Australia HY18 HY17
Production (mmboe) 1.7 2.1
Sales volume (mmboe) 1.7 2.2
Product Sales (US$m) 76 78
Production cost (US$/boe) 23.23 17.36
EBITDAX (US$m) 35 44
Capex (US$m) 29 44
Northern Australia EBITDAX was $35 million, 20%
lower than the first half of 2017. Unit production costswere impacted by the plan ned shutdown in May 2018.
Western Australia
Santos is one of the largest producers of domesticnatural gas in Western Australia and is also a significantproducer of gas liquids.
Santos’ position in two WA domest ic gas hubs (VaranusIsland and Devil Creek) provides opportunities to meetshort and long-term domest ic gas demand in the state.
Santos’ focus in WA is to grow production and marketshare in the WA domestic gas market.
W
estern Australia
| W |
HY18 HY17
Production (mmboe)
5.65.0
Sales volume (mmboe)
5.75.2
Product Sales
(US$m)
168 152
Production cost (US$/boe) 8.90 9.41
EBITDAX (US$m)
114 129
Capex (US$m)
1735
Western Australia EBITDAX was $114 million, 12%
lower than the first half of 2017.Santos’ share of Western Australia gas production
increased 17% to 27.9 PJ in the first ha lf of 2 018 due tostrong asset performance and the commencement oftwo new gas sales contracts. Santos’ share ofcondensate and oil production was 307,600 and475,700 barrels respectively .
Asia
Santos’ non-core Asian assets have been packaged andrun separately as a standalone business. These assetsinclude Santos in terests in Indonesia, Vietnam, Malaysiaand Bangladesh.
In May 2018, Santos announced the sale of its Asianportfolio to Ophir Energy plc for US$221 million.Under the terms of the sale, the transaction will havean effective date of 1 January 2018. Completion isexpected in the second half of 2018, and is subject tocustomary consents and approvals for a transaction ofthis nature. Santos’ 50% interest in the North WestNatuna PSC (Ande Ande Lumut) oil development inIndonesia is not included in the transaction package,with the intention that S antos exit th is asset separately.
A
sia
| A |
HY18 HY17
Production (mmboe)
2.83.5
Sales volume (mmboe)
2.73.3
Product Sales
(US$m)
134 128
Production cost (US$/boe) 11.22 10.83
EBITDAX (US$m)
9299
Capex (US$m)
Asia EBITDAXwas $92 million, 7% lower th an the first
half of 2017.Total production and sales volumes from the Asian
assets were lower than the previous half-year due tonatural field decline and lower net entitlement.
DIRECTORS’ REP O RT
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Net Profit/(Loss)
The 2018 first half net profit was $104 million; compared with a $506 million loss at half-year 2017. The $610 millionincrease in net profit is driven in part by a higher com modi ty pric e; as well as the sig nific ant red uct ion i n the be fore ta ximpairment loss of $7 6 million posted in 2018, compared to the $920 million posted in 2017.
Underlying profit of $217 milli on includes items after tax of $113 million ( before tax of $130 mill ion), referred to in thereconciliation of net profit/(loss) to underlying profit below.
Reconciliation of Net Profit/(Loss) to
Underlying Profit/(Loss)
2018$million
2017$million
Gross
Tax
Net
Gross Tax
Net
Net profit/(loss) after tax attributable to
equity holders of Santos Limited 104
(506)
Add/(deduct) the following:
Impairment losses 76
76920(231)689
| – |
Gains on sale of non-current assets (55)16(39)
(68)17(51)
Fair value adjustments on embedded derivatives
and hedges
| – | – |
–(2)
(2)Fair value adjustments on commodity h edges
–
109(33)76
(30)9(21)
130(17)113
(205)615
Underlying profit
1 Underlying profit excludes the impacts of asset acquisitions, disposals and impairments and the impact of hedging. The calculation of underlying profit
has changed from prior periods, to simplify the definition of underlying profit to enhance comparability to peer companies. Prior period underlying profithas been restated to a like for like basis for comparability. The non -IFRS financial informat ion is unaudite d however the numbers have been extractedfrom the fina nc ial statements which have been subject to review by the Company’s auditor.
EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF SANTOS LIMITED / DIVIDENDS
Equity attributable to equity holders of Santos Limited at 30 June 2018 was $6,998 million.On 22 August 2018, the Directors resolved to pay a fully franked interim dividend of $0.035 per fully paid ordinary
share on 27 September 2018 t o shareholders registered in the books of the Compan y at the close of business on 29August 2018 (“Record Date”). The Board also resolved that the Dividend Reinvestment Plan (“DRP”) will not be inoperation for the 2018 interim dividend.
CASH FLOW
The net cash inflow from operating activities of $644 million was 0.6% higher than the first half of 2017. This increaseis principally attributable to higher receipts from customers, offset by higher payments to suppliers and employees andhigher taxes. Net cash used in investing activities of $258 million was $36 million higher than the first half of 2017primarily due to lower proceeds realised from disposal of assets in 2018, of $23 million compared to $130 million in2017. Cash flows used in financing activities were $100 million lower than the first half of 2017, predominantly due to$250 million early repayment of the ECA facility in 2017, as well as lower proceeds from issues of ordinary shares in2018.
OUTLOOK
Sales volume guidance is main tained in the range of 72 to 76 mmboe and production guidance is maintained in the rangeof 55 to 58 mmboe for 2018.
POST BALANCE DATE EVENTS
On 22 August 2018, the Directors of Santos Limited resolved to pay an interim dividend on ordinary shares in respectof the 2018 half-year peri od as outlined above. The financial effect of these dividends has not been brought to accountin the half-year fina ncial report for the six months ended 30 June, 2018.
On 22 August 2018, Santos anno unced the acquisition of Quadrant Energy for US $2.15 billion. The acquisition is forecastto complete in the second half of 2018. The acquisition has no financial effect in the half-year financial statements forthe six months ended 30 June 2018.
DIRECTORS’ REP O RT
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DIRECTORS
The names of Directors of the Company in office during or since the end of the half-year are:
Surname Other Names
AllenYasmin Anita
Coates
Peter Roland (Chairman)CowanGuyMichael
Gallagher Kevin Thomas (Managing Director and Chief Executive Officer)
GohHockGuthrieVanessaAnn
HearlPeterRoland
Shi YujiangSpence
Keith William (Chairman)
1 Mr Coates ceased to be a Director and Chairman of Santos Limited effective 19 February, 2018.2 Mr Spence was appointed a Director of Santos Limited on 1 January 2018 and was appointed Chairman on 19 February 2018
Each ofthe above named Directors held office during or since the end of the half-year. There were no other persons
who acted as Directors at any time during the half-year and up to the d a te of th is report.
ROUNDING
Australian Securities and Investments Commission Corporations (Rounding in Financial/Directors’ Report) Instrument2016/191 applies to the Comp any. Accordingly, amounts have been rounded off in accordance with that Inst rument,unless otherwise indicated.
AUDITOR’S INDEPENDENCE DECLARATION
A copy of the auditor’s independence declaration as required by section 307C of the Corporations Act 2001 (Cth) is setout on page 7 and forms part of this report.
This report is made out on 22 August 20 18 in accordance with a resolution of the Directors.
Directo
22 August 2018
A member firm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards Legislation
Ernst & Young121 King William StreetAdelaide SA 5000 AustraliaGPO Box 1271 Adelaide SA 5001
| Ernst & Young 121 King William Street Adelaide SA 5000 Australia GPO Box 1271 Adelaide SA 5001 | Tel: +61 8 8417 1600 Fax: +61 8 8417 1775 ey.com/au |
Auditor’s Independence Declaration to the Directors of Santos Limited
As lead auditor for the review of Santos Limited for the half-year ended 30 June 2018, I declare to thebest of my knowledge and belief, there have been:
a)no contraventions of the auditor independence requirements of the Corporations Act 2001 in
relation to the review; andb)no contraventions of any applicable code of professional conduct in relation to the review.
This declaration is in respect of Santos Limited and the entities it controlled during the financial period.
Ernst & Young
R J CurtinPartnerAdelaide22 August 2018
CONSOLIDATED INCOME STATEMENTFOR SIX MONTHS ENDED 30 JUNE 2018
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30 June 2018
(Restated)
30 June 2017
Note
$million $million
Revenue from contracts with customers – Product sales 2.2 1,680 1,449Cost of sales 2.3
(1,162) (1,097)
Gro s s profit 518 352Revenue from contracts with customers – Other2.2
47 57
Other income 68 73
Impairment of non-current assets 3.4
(76) (920)
Other expenses 2.3
(115) (170)
Finance income 4.1
12 14
Finance costs 4.1
(120) (153)
Share of net profit of joint ventures 1 5
Profit/(loss) before tax 335 (742)
Income ta x (expens e)/b e nefi t
2.4
(212) 228
Royalt
| y |
-related taxation (expense)/benefi
(19) 8
| t |
Total taxation (expense)/benefit (231) 236
Net profit/(loss) for the period attributable to owners of
Santos Limited 104 (506)
Earnings per share attributable to the equity holders of
Santos Limited (?)Basic profit/(loss) per share 5.0 (24.4)
Diluted profit/(loss) per share
5.0 (24.4)
Di vidends per share (?)Paid during the period 2.5
–
| – |
Declared in respect of the period 2.5
3.5
| – |
The consolidated income statement is to be read in conjunction with the notes to the half-year financial statements.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFOR THE SIX MONTHS ENDED 30 JUNE 2018
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30 June 2018
(Restated)
30 June 2017
$million $million
Net profit/(loss) for the period 104 (506)
Other comprehensive income, net of tax:
Other comprehensive income to be reclassified to profit or loss insubsequent periods:
Exchang e (loss)/gain on translation of foreign operations
(186) 116
Tax effect –
| – |
(186) 116
(Loss)/gain on foreign currency loans designated as hedges of net
investments in foreign operations (83) 132Tax effect 25 (41)
(58) 91(Loss)/gain on derivatives designated as cash flow hedges (16) 9Tax effect 5 (3)
(11) 6
Net other comprehensive (loss)/income to be reclassified
to profit or loss in subsequent periods (255) 21
Items not to be reclassified to profit or loss in subsequent periods:
Actuarial gain on the defined benefit plan 3 2Tax effect (1) (1)
2 1Loss on financial liabilities at fair value through other
comprehensive income (FVOCI) (2) (30)
Tax effect 1 10
(1) (20)
Net other comprehensive income/(loss) that will not be
reclassified to profit or loss in subsequent periods 1 (19)
Other comprehensive (loss)/income, net of tax (254) 194Total comprehensive loss attributable to owners of Santos
Limited (150) (312)
The consolidated statement of comprehensive income is to be read in conjunction with the notes to the half-year financialstatements.
CONSOLIDATED STATEMENT OF FINANCIAL POSITIONAS AT 30 JUNE 2018
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30 June 2018 31 December 2017
Note
$million $million
Current assetsCash and cash equivalents 1,492 1,231Trade and other receivables
411 440
Prepayments 11 28
Inventories 252 266
Other financial assets 14
| – |
Tax receivable 40 7
Assets held for sale 3.5
| – |
Total current assets 2,502 1,972
Non-current assetsPrepayments15 17Investments in joint ventures 44 43
Other financial assets 38 134
Explorati on and evaluation assets 3.1
355 459
Oil and gas asset s 3.2
9,215 9,536
Other land, buildings, plant and equipmen
103 126
| t |
Deferred tax assets 1,139 1,419
Total non-current assets10,909 11,734Total assets13,411 13,706Current liabilitiesTrade and other payables455 49
Other liabilities 12 5
Contract liabilities 16 3
Interest-bearing loans and borrowings 803 207
Current tax liabilities 18 17
Provisions 125 142
Other financial liabilities 132 82
Liabilities directly associated with assets held for sale
3.5
| – |
Total current liabilities1,743 951Non - current liabilitiesOther liabilities 2 1Contract liabilities 103 11
Interest-bearing loans and borrowings 3,026 3,736
Deferred tax liabilities 160 240
Provisions 1,344 1,494
Other financial liabilities 35 20
Total n on-current liabilities4,670 5,604Total liabilities6,413 6,555Net assets6,998 7,151EquityIssued capital 4.2 9,028 9,034Reserves 122 51
Accumu lated losses (2,152)
(1,934)
Total equity 6,998 7,151
The consolidated statement of financial position is to be read in conjunction with the notes to the half-year financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWSFOR THE SIX MONTHS ENDED 30 JUNE 2018
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30 June 2018 30 June
2017
$million $million
Cash flows from operating activitiesReceipts from customers 1,725 1,542Interest received 12 14
Dividends received
| – |
Pipeline tariffs and other receipts 23 43
Payments to suppliers and employees (889) (739)
Exploration and evaluation seismic and studies
(45) (28)
Restoration expenditure (11) (22)
Royalty and excise paid (27) (26)
Borrowing costs paid (88) (126)
Income taxes paid (47) (37)
Income taxes received 2 23
Royalty-related tax paid (13) (13)
Other operating activities 2 2
Net cash provided by operating activities644 640Cash flows from investing activitiesPayments for:
Exploration and evaluation assets (17) (93)
Oil and gas assets (251) (240)
Other land, buildi ngs, plant and equipment (3) (3)
Acquisitions of exploration an d evaluation assets
(4) (14)
Borrowing costs paid
| – |
(5)
Proceeds on disposal of non-current assets 23 130
Other investing activities (6) 3
Net cash used in investing activities(258) (222)
Cash flows from financing activitiesDividends paid
–
| – | – |
Repayments of borrowings (112) (368)
Proceeds from issues of ordinary shares
| – |
Purchase of shares on market (Treasury shares)
(8) (4)
Net cash used in financing activities (120) (220)
Net increase in cash and cash equivalents 266 198Cash and cash equivalents at the beginning of the period 1,231 2,026Effects of exchange rate changes on the balances of cash held in
foreign currencies (5) 2Cash and cash equivalents at the end of the period 1,492 2,226
The consolidated statement of cash flows is to be read in conjunction with the notes to the half-year financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFOR THE SIX MONTHS ENDED 30 JUNE 2018
12 Santos Limited Half-year Financial Report – 30 June 2018
Equity attributable to owners of Santos Limited
Issued
capital
Translation
reserve
Hedging
reserve
Financialliabilities at
FVOCI
Accumulated
profitsreserve
Accumulated
losses
Totalequity$million
$million $million
$million
$million
$million $millionBalance at 1 January 20178,883(830)7–313(1,298)7,075
Net loss for the period
| – | – |
| – | – | – |
(506)(506)Other comprehensive income/(loss) for the period
| – |
2076
(20)
| – |
1194Total comprehensive income/(loss) for theperiod–2076(20)–(505)(312)
Transactions with owners in their capacity as owners:
Shares issued
| – |
| – | – | – | – |
Share buy-back(held as Treasury shares) (3)
| – |
| – | – | – | – |
(3)Share-based payment transactions 3
| – |
| – | – | – |
Balance at 30 June 20179,034(623)13(20)
(1,800)6,917
Balance at 1 July 2017 9,034(623)13(20)313(1,800)6,917Transfer retained profits to accumulated profits reserve
| – | – |
| – | – |
(282)
| – |
Items of comprehensive income:
Net profit for the period
| – | – |
| – | – | – |
146146Other comprehensive income/(loss) for the period
| – |
95(8)
(1)
| – |
(1)85Total comprehensive income/(loss) for the period – 95 (8) (1) – 145 231Transactions with owners in
their capacity as owners:
Share buy-back(held as Treasury shares) (5)
| – |
| – | – | – | – |
(5)Share-based payment transactions 5
| – |
| – | – | – |
Balance at 31 December 20179,034(528)5(21)
(1,934)7,151
Balance at 1 January 2018 9,034 (528) 5 (21)595 (1,934) 7,151Transfer retained profits to accumulated profits reserve––––327 (327)–Items of comprehensive income:
Net profit for the period
–
––
–
–
104104Other comprehensive (loss)/income for the period
–
(244)(11)
(1)
–
2(254)Total comprehensive (loss)/income for the period–(244)(11)(1)–106(150)
Transactions with owners in their capacity as owners:
Share buy-back(held as Treasury shares) (8)
––
–
–
–(8)Share-based payment transactions 2
––
–
–
Balance at 30 June 2018 9,028(772)(6)(22)922 (2,152) 6,998
The consolidated statement of changes in equity is to be read in conjunction with the notes to the half-year financial statements.
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SECTION 1: BASIS OF PREPARATION
1.1CORPORATE INFORMATION
Santos Limited (“the Company”) is a company limited by shares incorporated in Australia whose shares arepublicly traded on the Australian Securities Exchange (“ASX”). The condensed consolidated financial report ofthe Company for th e six month s ended 30 June 2018 (“the half-year financial report”) comprises the Companyand its controlled entities (“the Group”). Santos Limited is the ultimate parent entity in the Group.
The half-year financial report was authorised for issue in accordance with a resolution of the Directors on 22August 2018.
The half-year financ ial report is presented in United States dollars.1.2 BASIS OF PREPARATION
This general purpose half-year financial report has been prepared in accordance with AASB 134 Interim FinancialReporting and the Corporations Act 2001.The half-year financial report does not include all notes of the type normally included within the annual financialreport and therefore cannot be expected to provide as full an understan ding of the financial performance, financ ialposition and financing and investing activities of the Grou p as the annual financial report.It is recommended that the half-year financial report be read in conjunction with the annual financial report forthe year ended 31 December 2017 and considered together with any public announcements made by theCompany during the six months ended 30 June 2018, in accordance with the continuous disclosure obligationsof the ASX listing rules.Changes to significant accounting policies are described in Section 5.
1.3 SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPT ION S
The significant accounting judgements, estimates and assumptions adopted in the half-year financial report areconsistent with those applied in the preparation of the Group’s annual financial report for the year ended31 December 2017, except for those that have arisen as a result of new standards, amendments to standardsand interpretations effective from 1 January 2018, as outlined in note 5.4.
This section provides information about the basis of preparation of the half-year financial report, and certain accountingpolicies that are not disclosed elsewhere.
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SECTION 2:
FINANCIAL PERFORMANCE
2.1SEGMENT INFORMATION
The Group has identified its operating segments to be the five key assets/operating areas of the Cooper Basin,Queensland & NSW, Papua New Guinea (“PNG”), Northern Australia and Western A ustralia (“WA”), based onthe nature and geographical location of the assets, plus Asia and “Other” non-core assets. This is the basis onwhich internal reports are provided to the Chief Executive Officer for assessing performance and determiningthe allocation of resources within the Group. Comparative disclosures have been restated to a consistent basis.Segment performance is meas u red ba sed on earnings before interest, tax, impairment, exploration and evaluation,depletion, depreciation and amortisation (“EBITDAX”). Corporate and exploration expenditure and inter-segmenteliminations are included in the segment disclosure for reconciliation purposes.Changes in Segment informationAs at 1 January 2018, the “Other” reporting segment was restructured to comprise Santos’ Asian assets only. NewSouth Wales entered the core portfolio and is now reported under the segment “Queensland and NSW” and WAOil is now reported under th e segment “Western Australia”. Comparative disclosures have been restated to aconsistent basis.
This section focuses on the operating results and financial performance of the Group. It includes disclosures ofsegmental financial information and dividends.
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2.1 SEGMENT INFORMATION (continued)
Cooper
Basin
Queensland
&NSW PNG
NorthernAustralia
WesternAustralia Asia
Corporate,exploration,eliminations
& other Total$million 20182018 2018 2018 2018 20182018 2018RevenueProduct sales to external
customers449 416 215 75 168 134 223 1,680Inte
-segment productsales
53 47 – – – – (100)
| r | ||
–Revenue
other fromexternal customers 27 6 2 – 4 – 8 47Total segment
revenue529 469 217 75 172 134 131 1,727CostsProduction costs (63) (38)
–
(31)
(40)(50) (31)10 (243)
Other operating costs (31) (38)
(22)
–(8) (8)(53)
(160)
Third-party product
purchases(200) (120)
––– –(106)
(426)
Inter-segment purchases
*
(3)(33)
––– –36 –Other(3) 451 – – (3) (55)
(15)
EBITDAX229 285 165 35 114 92 (37)
Depreciation and
depletion(98) (86)
(58)
(24)(39) (13)(10)
(328)
Exploration and
evaluation expensed – – – – – – (45)
(45)
Net impairment
(loss)/reversal–(4)
(25)
–– (47)– (76)Change in future
restoration assumptions – – – – 9 – – 9EBIT131 195 82 11 84 32 (92)
Net finance costs (108)
(108)
Profit before tax 335Income tax expense (212)
(212)
Royalty-related taxation
benefit/(expense)–– –– (22) –3 (19)
Net profit for the
period 104
1.Inter-segment pricing is determined on an arm's length basis. Inter-segment sales are eliminated on consolidation.
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2.1 SEGMENT INFORMATION (continued)
Cooper
Basin
Queensland
&NSW PNG
NorthernAustralia
WesternAustralia Asia
Corporate,exploration,eliminations
& other Total$million (Restated) 20172017 2017 20172017 20172017 2017RevenueProduct sales to external
customers 315 347 248 78 152 128 181 1,449Inte
-segment productsales
60 7 – – – – (67)–Revenue
r–
other fromexternal customers 26 7 3 – 23 – (2) 57Total segment
revenue 401 361 251 78 175 128 112 1,506CostsProduction costs (69) (34) (27)(37)(47) (34)9 (239)Other operating costs (37) (33) (22) – (8) (7) (82) (189)Third-party product
purchases(82) (84) (1)–– –(120) (287)Inter-segment purchases* (1) (57) – – – – 58 –Other(55) - 2 3 9 12 (44) (73)EBITDAX157 153 203 44 129 99 (67) 718Depreciation and
depletion(72) (96) (52) (29)(49) (37)(13) (348)Exploration and
evaluation expensed – – – – – – (53) (53)
–
Net impairment
(loss)/reversal480 (1,241) (4)
–(6) (149)– (920)EBIT565 (1,184) 147 15 74 (87) (133) (603)
Net finance costs (139) (139)
Loss before tax (742)
Income tax benefit 228 228Royalty-related taxation
benefit/(expense)–– –3 (12) –17 8Net loss for the period (506)
1.Inter-segment pricing is determined on an arm's length basis. Inter-segment sales are eliminated on consolidation.
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2.2 REVENUE FROM CONTRACTS WITH CUSTOMERS
30 June 2018
(Restated)
30 June 2017
$million $million
Product sales:
Gas, ethane and liquefied gas 1,114 1,049
Crude oil 400 262
Condensate and naphtha 132 106
Liquefied petroleum gas 34 32
Total product sales
1,680 1,449
Total product sales include third party product sales of $523 million (2017: $392 million).
Revenue – other:
Liquidated damages 5 25
Pipeline tolls & tariffs 35 22
Other 7 10
Total revenue – other 47 57
Total revenue from contracts with custom ers 1,727 1,506
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2.3 EXPENSES
30 June 2018
(Restated)
30 June 2017
$million $million
Cost of Sales:
Production costs:
Production expenses227 2
Production facilities operating leases 16 31Total production costs 243 239Other o
p
eratin
| g |
costs:
LNG plant costs 33 32Pipeline tariffs, processing tolls and other 84 88Fair value losses on onerous pipeline contracts–
Royalty and excise 35 30Shipping costs8 8
Total other operating costs 160 189Total cash cost of production 403 428Depreciation and dep let ion costs:
Depreciation of plant , eq uipment and buildings 212 221
Depletion of sub-surface assets 115 126Total depreciation and depletion 327 347Third-party product purchases 426 287
Decrease in product stock 6 35Total cost of sales 1,162 1,097
Other expenses:
Sellin
7 7
| g |
General & administration 43 48
Depreciation 1 1
Foreign exchange (gains)/losses (90) 93
Fair value losses/(gains) on commodity derivatives (oil
hedges)
(30)
Fair value hedges, (gains)/losses:
On the hedging instrumen t 13 33
On the hedged item attributable to the hedged risk
(13) (35)
Exploration and evaluation expensed
45 53
Total other expenses 115 170
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2.4 TAXATION
Current income tax expense of $21 2 million (2017: tax benefit $228 million) recognised i n the income statement
for the Group includes the following, which attributes to the high effective tax rate for the period:
?Foreign exchange losses relating to AUD tax bases in USD denominated companies of $67 million; and?Foreign losses not recognised of $2 3 million, relating to impairment charge of $7 6 million on the Bestari
exploration asset.
2.5DIVIDENDS
Dividend
per share
?
Total
$million
Franked/unfranked
Payment
date
Dividends paid during the period:
2018Nilnilnil
2017Nilnilnil
Franked dividends paid durin g the period were
franked at the tax rate of 30%.Dividends declared in respect of thecurrent period:
2018 Interim dividend per ordinary share3.5
72.9
After the reporting date, on 22 August 2018, the 2018 interim dividend of 3.5 cents per share was declared by
the Directors. Consequently, the financia l effect of the dividend has not been brought to account in the half-y earfinancial statements for the six months ended 30 June 2018, and will be recognised in subsequent financial reports.
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SECTION 3: CAPITAL EXPENDITURE, OPERATING ASSETS AND RESTORATION
OBLIGATIONS
3.1 EXPLORATION AND EVALUATION ASSETS
Six months ended
30 June 2018
$million
31 Dec 2017
$million
30 June 2017
$million
Balance at the beginning of the period 459 422 495
Acquisitions 4 14 35
Additions 25 37 57
Expensed (2)
– (18)
Impairment losses(29)
(7)(156)
Transfer to oil and gas assets in production(7)
(7) (6)
Net impairment losses on assets transferred to held
for sale(76)
– –
Exchange differences (19)
– 15
Balance at the end of the period 355 459 422
Comprising:
Acquisition costs 70 95 82Successful exploration wells 173 253 290Pending determination of success 112 111 50355 459 422
This section includes information about the assets used by the Group to generate profits and revenu e, specificallyinformation relating to exploration and evaluation assets, oil and gas assets, and commitments for capital expenditurenot yet recognised as a liability.The life cycle of our assets is summarised as follows:
:
| : | |
Explorationand
Evaluation
AppraisalDrillingDevelopmentProductionDecommissioning
Abandonmentand
Restoration
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3.2 OIL ANDGAS ASSETS
Six months ended30 June 2018 31 Dec 2017 30 June 2017
$million
$million$million
Assets in developmentBalance at the beginning of the period 119 9490Additions 36 25
Transfer to oil and gas assets in production (1) (2)–
Exchange differences (1)2–
Balance at the end of the period 153 11994Producing assetsBalance at the beginning of the period 9,417 9,52310,308Additions
226 2 38179Transfer from exploration and evaluation as sets 7
Transfer from oil and gas assets in develop men t 1 2
–
| – |
Disposals – (4)
| – |
Depreciation and dep let ion (316) (384) (334)Net impairment losses – (1)(764)
Transfer to assets held for sale (153) –
| – |
Net impairment reversals on assets transferred to held
for sale29 ––
Exchange differences (149) 36
Balance at the end of the period 9,062 9,4179,
Total oil and gas assets 9,215 9,5369,617Comprising:
Exploration and evaluation e xpenditure pending
commercialisation 98 95182Other capitalised expenditure 9,117 9,4419,
9,215 9, 5369,
1.Includes impact on restoration assets following changes in future restoration provision assumptions.
3.3CAPITAL COMMITMENTS
There has been no material change to the capital commitments disclosed in the most recent annual financial
report.
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3.4 IMPAIRMENT OF NON-CURRENT ASSETS
Impairment expense recorded during the period is as follows:
30 June 2018 30 June 2017
Note
$million $million
Assets held for sale3.547 –
Exploration and evaluation assets 29 156
Oil and gas assets – 764
Total impairment 76 920
The carrying amounts of the Group’s oil and gas assets are reviewed at each reporting date to determine whetherthere is any indication of impairment. Where an indicator of impairment exists, a formal estimate of the recoverableamount is made.
The expected future cash flow estimation is based on a number of fa ctors, variables and assumptions, the mostimportant of which are estimates of reserves, future production profiles, third party supply, commodity prices, costsand foreign exchange rates. In most cases, the present value of future cash flows is most sensitive t o estimates offuture commodity prices, discount rates and production.Future prices (US$/bbl) used were:
2018 2019 2020 2021 2022
2023
65.00 60.00 65.00 70.00 75.77 77.29
1. Based on US$70/bbl (2018 real) from 2022 escalated at 2% p.a.
The future estimated foreign exchange rate applied is A$1/US$0.75.The discount rates applied to the future forecast cash flows are based on the Group’s weighted average cost ofcapital, adjusted for risks where appropriate, including functional currency of the asset, and risk profile of thecountries in which the asset operates. The range of pre-tax discount rates that have been applied to non-currentassets is between 11% and 14%.In the event that future circumstances vary from these assumptions, the recoverable amount of the Group’s oil andgas assets could change materially and result in impairment losses or the reversal of previous impairment losses.Due to the interrelated nature of the assumptions, movements in any one variable can have an indirect impact onothers and individual variables rarely change in isolation. Additionally, management can be expected to respond tosome movements, to mitigate downsides and take advantage of upsides, as circumstances allow. Consequently, it isimpracticable to estimate the indirect impact that a change in one assumption has on other variables and hence, onthe likelihood, or extent, of impairments or reversals of impairments under different sets of assumptions insubsequent reporting periods.Recoverable amounts and resulting impairment write-downs recognised for the half year ended 30 June 2018 are:
Segment
Subsurface
assets
$million
Plant andequipment
$million
Total$million
Recoverable
amount
$million
Exploration and evaluation assets:
PNG – PPL 426 Exploration 25 – 25 nil
Gunnedah Basin Exploration 4 – 4 nil
Total impairment of exploration andevaluation 29 – 29
1. Impairment of exploration and evaluation assets relates to certain individual licenses/areas of interest that have been impaired to nil.
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3.5 ASSETS HELD FOR SALE
Non-current assets are classified as held for sale and measured at the lower of their carrying amount and fair valueless costs of disposal if their carrying amount will be recovered principally through a sale transaction. They are notdepreciated or amortised. For an asset to be classified as held for sale, it must be available for immediate sale in itspresent condition and its sale must be highly probable.An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) to fairvalue less cost of disposal. A gain is recognised for any subsequent increases in fair value less cost of disposal of anasset (or disposal group) but not in excess of any cumulative impairment loss previously recognised. A gain or lossnot previously recognised by th e date of the sale of the non -current a sset (or disposal gr oup) is rec ognised at thedate of derecognition.Following the Group’s decision to divest its interests in its non-core Asian assets, the associated assets and liabilitiesattributed to the Asia segment, have been classified as held for sale at 3 May 2018. The sale and purchase agreementsremained subject to outstanding conditions at 30 June 2018 and will be accounted for upon completion or waiverof each significant condition.The following amounts are included within the financial statements in relation to assets and liabilities classified asheld for sale:
30 June
2018
Assets and liabilities classified as held for sale
$million
Trade and other receivables 45
Inventories 9
Other financial assets 75
Oil and gas assets 153
Assets classified as held for sale 282
Trade and other payables 46
Other liabilities 45
Restoration provisions 91
Liabilities classified as held for sale 182
Net assets 100
ImpairmentA net impairment loss of $47 million attributed to the write-down/(reversal) of the Asian assets held for sale to theirfair value less costs of disposal has been recorded.The impairment has arisen as each Asian asset disposed has been written down to the lower of its carrying amountand fair value less cost to sell. Upon completion of the sale, currently forecast for the second half of 2018, a gain upondisposal will arise from the carrying value recorded at 30 June 2018. In addition, upon completion, the foreign currencytranslation reserve relating to the companies disposed of will be recycled to the Income Statement. The Groupcurrently forecasts that the net impairment will be offset in the full year accounts and a net gain on disposal to aris eupon completion of these transactions.Income statement impactFor the period ended 30 June 2018, the net loss after tax attributable to the assets held for sale is $9 million. Whenexcluding the net loss of the assets held for sale from the net profit of the Group, the impact on reported earningsper share is negligible.
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SECTION 4: FUNDING AND RISK MANAGEMENT
4.1 NET FINANCE COSTS
30 June 2018 30 June 2017
$million $million
Finance income:
Interest income12 14
Total finance income 12 14Finance costs:
Interest paid to third parties(99)(136)
Deduct borrowing costs capitalised
(97) (131)
Unwind of the effect of discounting on provisions (23) (22)
Total finance costs (120) (153)
Net finance costs (108) (139)
Our business has exposure to capital, credit, liquidity and market risks. This se ction provi des informatio n relating toour management of, as well as our policies for measuring and managing these risks.
25 Santos Limited Half-year Financial Report – 30 June 2018
4.2 ISSUED CAPITAL
Six months ended30 June 2018
Number of shares
31 December 2017
Number of shares
30 June 2017
Number of shares
30 June 2018
$million
31 December 2017
$million
30 June 2017
$millionMovement in fully paid ordinary shares
Balance at the beginning of the period 2,083,070,879
2,083,221,296 2,032,389,675
9,034
9,034
8,883Share purchase plan, net of costs–
–50,847,537–
–
Shares purchased on-market (Treasuryshares)– – – (8)
(5)
(3)
Issue of Treasury shares on vesting ofemployee share schemes– – – 2 5
Replacement of restricted classes of ordinaryshares with shares purchased on-market (55,451)
(150,417)(21,281)–
–
–
Shares issued
on vesting of share acquisitionrights–
–5,365–
–
–
Balance at the end of the period 2,083,015,428 2,083,070,879 2,083,221,296 9,028
9,0349,03430 June 2018
Number of shares
31 December 2017
Number of shares
30 June 2017Number of sharesMovement in Treasury sharesBalance at the beginning of the period 587,993
735,599
–
Shares purchased on-market 2,000,000
1,200,000
1,400,000Treasury shares utilised:
Santos Employee Share1000 Plan–
(301,584)
–
Santos Employee ShareMatch Plan–
(553,416)
–
Utilised on vesting of SARs(40,461)
(357,724)(21,221)
Executive STI (deferred SARs)(312,731)
–(261,011)
Executive STI (ordinary shares)– –(193,977)
Executive sign-on grants(42,585)
(23,777)(166,911)
Santos Employee Share1000 Plan (relinquished shares)
–
39,312
–
Replacement of partially paid shares with shares purc hased on-market
(15,000)
–
–
Replacement of ordinary shares with shares purchased on-market
(55,451)
(150,417)(21,281)
Balance at the end of the period2,121,765 58 7,993
5,599
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4.3FINANCIAL RISK MANAGEMENT
Exposure to foreign currency risk, interest rate risk, commodity price risk, credit risk and liquidity risk arises in thenormal course of the Group’s business. The Group’s overall financial risk management strategy is to seek to ensurethat the Group is able to fund its corporate objectives and meet its obligations to stakeholders. Derivative financialinstruments may be used to hedge exposure to fluctuations in foreign exchange rates, interest rates and commodityprices.The Group uses various methods to measure the types of financial risk to which it is exposed. These methodsinclude cash flow at risk and sensitivity analysis in the case of foreign exchange, interest rate and commodity pricerisk, and ageing and credit rating concentration analysis for credit risk.Financial risk management i s carried out by a central treasury department which operates under Board-approvedpolicies. The policies govern the framework and principles for overall risk management and covers specific financialrisks, such as foreign exchange risk, interest rate risk and credit risk, approved derivative and non-derivative financialinstruments, and liquidity management.(a) Foreign currency risk
Foreign exchange risk arises from commercial transactions and valuations of assets and liabilities that aredenominated in a currency that is not the entity’s functional currency.
The Group is exposed to foreign currency risk principally through the sale of products, borrowings and capitaland operating expenditure incurred in currencies other than the functional currency. In order to economicallyhedge foreign currency risk, the Group from time to time enters into forward foreign exchange, foreigncurrency swap and foreign currency option contracts.The Group has certain investments in domestic and foreign operations whose net assets are exposed toforeign currency translation risk.All foreign currency denominated borrowings of Australian dollar functional currency companies are eitherdesignated as a hedge of US dollar denominated investments in foreign operations (2018: $1,407 million; 2017:
$1,407 million), swapped using cross-currency swaps to US dollars and designated as a hedge of US dollardenominated investments in foreign operations (2018: $nil; 2017: $nil), or offset by US dollar denominatedcash balances (2018: $802 million; 2017: $835 million). As a result, there were no net foreign currency gainsor losses arisin g from translation of US dollar-denominated borrowings recognise d in the income statementin 2018.
Monetary items, including financial assets and liabilities, denominated in currencies other than the functionalcurrency of an operation, are periodically restated to US dollar equivalents, and the associated gain or loss istaken to the income statement. The exception is foreign exchange gains or losses on foreign currencyprovisions for restoration at operating sites that are capitalised in oil and gas assets.(b) Market risk
Cash flow and fair value interest rate riskThe Group’s interest rate risk arises from its borrowings. Borrowings issued at variable rates expose theGroup to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interestrate risk.The Group adopts a policy of ensuring that the majority of its exposure to changes in interest rates onborrowings is on a floating rate basis. Interest rate swaps have been entered into as fair v alue hedges oflong-term notes. When transacted, these swaps had maturities ranging from 1 to 20 years, aligned with thematurity of the related notes.The Group has entered into interest rate swaps which fix the reference rate on $1,200 million of US dollardenominated floating rate debt. These contracts are in place to cover interest payments through to 21 March2019 and are designated as cash flow hedges.The Group’s interest rate swaps have a notional contract amount of $1,577 million (2017: $1,577 million) anda net fair value of $45 million (2017: $61 million). The net fair value amounts were recognised as fair valuederivatives.
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4.3FINANCIAL RISK MANAGEMENT (continued)
Commodity price riskThe Group is exposed to commodity price fluctuations through the sale of petroleum products and other oi l
price linked contracts. The Group may enter into crude oil price swap and option contracts to manage itscommodity price risk. At 30 June 2018, the Group has 9.7 million barrels (2017: 12.5 million) of open oil priceoption contracts covering 2018 (2018: 6.3 million; 2017: 12.5 million) and 2019 exposures (2018: 3.4 million;2017: nil).
The 3-way collar option structure utilised for the 2018 exposures does not qualify for hedge accounting, withthe movement in fair value recorded in the income statement. The 2019 exposures are hedged using zero costcollars and are designated as cash flow hedges.(c) Fair values
The financial assets and liabilities of the Group are all in itially recognised in the statement of financial positionat their fair values. Receivables, payables, interest-bearing liabilities and other financi al assets and liabilities,which are not subsequently measured at fair value, are carried at amortised cost.
The following summarises the significant methods and assumptions used in estimating the fair values of financialinstruments:
DerivativesThe fair value of interest rate swaps is calculated by discounting estimated future cash flows based on the terms
of maturity of each contract, using market interest rates for a similar instrument at the reporting date. Wherethese cash flows are in a foreign currency, the present value is converted to US dollars at the foreign exchangespot rate prevailing at reporting date.
Financial liabilitiesFair value is calculated based on the present value of future principal and interest cash flows, discounted at the
market rate of interest at the reporting date. Where these ca sh flows are in a foreign cu rrency, the pre sentvalue is converted to US dollars at the foreign exchange spot rate prevailing at reporting date.Interest rates used for determining fair valueThe interest rates used to discount estimated future ca sh flows, where applicable, are based on the marketyield curve and credit spreads at the reporting date.The interest rates including credit spreads used to determine fair value were as follows:
30 June 2018 31 Dec 2017
%%
Derivatives2.0 – 3.0 1.4 – 2.5
Loans and borrowings 2.0 – 3.0 1.4 – 2.5
The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments byvaluation technique:
Level 1: quoted (unadjusted) prices in active markets for identical assets and liabilities;Level 2: other techniques for which all inputs which have a significant effect on the recorded fair
value are observable, either directly or indirectly;Level 3: techniques which use inputs which have a significant effect on the recorded fair value that
are not based on observable market data.All of the Group’s financial instruments were valued using the Level 2 valuation technique.
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SECTION 5: OTHER
5.1ACQUISITION/DISPOSAL OF CONTROLLED ENTITIES
There were no acquisitions o r disposals of controlled entities during the six months ended 30 June 2018.
5.2 CONTINGENT LIABILITIES
There has been no material change to the contingent liabilities disclosed in the most recent annual fi nancial report.
5.3
EVENTS AFTER THE END OF THE REPORTING PERIOD
On 22 August 2018, the Directors of Santos Limited declared an interim dividend on ordinary shares in respectof the 2018 half-year period. Conseque ntly, the financial effect of these dividends has not bee n brought to accountin the half-year financial statements for the six months ended 30 June 2018. Refer to note 2.5 for details.On 22 August 201 8, Santos announced t he acquisition of Quadrant Ener gy for US$2.15 billio n. The acquisi tion isforecast to complete in the second half of 2018. The acquisition has no financial effect in the half-year financialstatements for the six months ended 30 June 2018.
5.4 ACCOUNTING POLICIES
(a) Significant accounting policies
The accounting policies adopted in the preparation of the half-year fi nancial report are consistent wit h thoseapplied in the preparation of the Group’s annual financial report for the year ended 31 December 2017,except for new standards, a mendments to standards and interpretations effective from 1 January 2018.
The Group has adopted AASB 15 Revenue from Contracts with Customers (“AASB 15”) from 1 January 2018.The impact of the adoption of this standard and the new accounting policies are disclosed in more detailbelow.
A number of other new standards are effective from 1 January 2018 but they do not have a material impacton the Group’s half-year fina ncial report.
(b) Adoption of AASB 15
DescriptionAASB 15 establishes a comprehensive frame work for determining whe ther, how much, a nd when revenue is
recognised. It replaced AASB 118 Revenue and AASB 111 Construction Contracts and related interpretations.The Group has adopted AASB 15 from 1 January 2018 which resulted in changes in accounting policies andadjustments to amounts recognised in the half-year consolidated financial statements.TransitionIn accordance with the transition provisions of AASB 15, the Group has adopted the full retrospectivetransition approach, where any adjustment to historical revenue transactions (that impacts net profit) hasbeen recorded against opening retained earnings as at 1 January 2017. Comparatives for the 2017 reportingperiod have been restated.The Group undertook a detailed review of its revenue contracts that were entered into during the tra nsitionperiod and concluded that there were no adjustments required to net profit or opening retained earningson transition.Application of AASB 15 has resulted in t he f ollowi ng in significant transition adjustments:
i.Reclassification of other income and other revenues to revenue from contracts withcustomers; andii.Adjustments of equal or similar amounts to product sales and cost of sales line items, arising from gas
swap arrangements.
This section provides information that is not directly related to the specific line items in the financial statements,including information about contingent liabilities, events after the end of the reporting period, and changes to accountingpolicies and disclosures.
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5.4ACCOUNTING POLICIES (continued)
(b) Adoption of AASB 15 (continued)
The total impact of transition adjustments on 30 June 2017 reported revenue is as follows:
30 June 2017
Transitionadjustment
(Restated)
30 June 2017
Revenue from contracts with custo mers –
Product sales 1,453 (4) 1,449Cost of sales (1,088)
(9) (1,097)
Gross profit
65(13)352Revenue from contracts with customers – Other 43 14 57Other income 74
(1) 73
Total–The Group has elected to change from the “entitlements method” to the “sales method” of accounting for
sales revenue. Previously under the entitlements method, sales revenue was recognised on the basis of theGroup’s interest in a produci ng field. Under the sales method, revenue will be recognised based on volumessold under contracts with customers, at the point in time where performance obligations are consideredmet.Accounting policyRevenueRevenue from contracts with customers is recognised in the income sta tement when the significa nt risks andrewards of ownership have been transferred to the buyer. Revenue is recognised and measured at the fairvalue of the consideration or contributions received, net of goods and services tax or similar taxes, to theextent it is probable that the economic benefits will flow to the Group and the revenue can be reliablymeasured.Sales revenueSales revenue is recognised using the “sales method” of accounting. The sales method results in revenuebeing recognised based on volumes sold under contracts with customers, at the point in time whereperformance obligations are considered met. Generally, regarding the sale of hydrocarbon products, theperformance obligation will be met when the product is delivered to the specified measurement point (gas)or point of loading/unloading (li quids).Revenue earned under a production sharing contract (“PSC”) is recognised on a net entitlements basisaccording to the terms of the PSC. Generally, under these terms the local government retains title to theresources, and is therefore entitled to its share of the production and revenue, after allowing for the jointventure partners to extract and sell their share of hydrocarbons to recover specified costs and a profitmargin.Contract liabilitiesA contract liability is recorded for obligations under sales contracts to deliver natural gas in future periodsfor which payment has alrea dy been received.
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DIRECTORS’ DECLARATION
FOR THE SIX MONTHS ENDED 30 JUNE 2018
In accordance with a resolution of the Directors of Santos Limited (“the Company”), we state that:
In the opinion of the Directors of the Company:
1.The financial statements and notes of the consolidated entity are in accordance with the Corporations Act 2001
(Cth), including:
(a) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2018 and ofitsperformance for the half-year ended on that date; and
(b) complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations
2001 (Cth); and2.There are reasonable grounds to believe that the Company will be able to pay its debts as and when they becomedue and payable.
Dated this 22nd day of August 2018
On behalf of the Board:
Directo
Adelaide
A member firm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards Legislation
Ernst & Young121 King William StreetAdelaide SA 5000 AustraliaGPO Box 1271 Adelaide SA 5001
| Ernst & Young 121 King William Street Adelaide SA 5000 Australia GPO Box 1271 Adelaide SA 5001 | Tel: +61 8 8417 1600 Fax: +61 8 8417 1775 ey.com/au |
Independent Auditor's Review Report to the Members of SantosLimited
Report on the Half-Year Financial Report
Conclusion
We have reviewed the accompanying half-year financial report of Santos Limited (the Company) and itssubsidiaries (collectively the Group), which comprises the condensed consolidated statement offinancial position as at 30 June 2018, the condensed consolidated statement of comprehensiveincome, condensed consolidated statement of changes in equity and condensed consolidatedstatement of cash flows for the half-year ended on that date, notes comprising a summary ofsignificant accounting policies and other explanatory information, and the directors’ declaration.
Based on our review, which is not an audit, nothing has come to our attention that causes us to believethat the half-year financial report of the Group is not in accordance with the Corporations Act 2001,including:
a)giving a true and fair view of the consolidated financial position of the Group as at 30 June 2018
and of its consolidated financial performance for the half-year ended on that date; andb)complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations
Regulations 2001.
Directors’ Responsibility for the Half-Year Financial Report
The directors of the Company are responsible for the preparation of the half-year financial report thatgives a true and fair view in accordance with Australian Accounting Standards and the CorporationsAct 2001
and for such internal control as the directors determine is necessary to enable thepreparation of the half-year financial report that is free from material misstatement, whether due tofraud or error.
Auditor’s Responsibility
Our responsibility is to express a conclusion on the half-year financial report based on our review. Weconducted our review in accordance with Auditing Standard on Review Engagements ASRE 2410Review of a Financial Report Performed by the Independent Auditor of the Entity, in order to statewhether, on the basis of the procedures described, anything has come to our attention that causes usto believe that the half-year financial report is not in accordance with the Corporations Act 2001including: giving a true and fair view of the Group’s consolidated financial position as at 30 June 2018and its consolidated financial performance for the half-year ended on that date; and complying withAccounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001.As the auditor of the Group, ASRE 2410 requires that we comply with the ethical requirementsrelevant to the audit of the annual financial report.
A review of a half-year financial report consists of making enquiries, primarily of persons responsiblefor financial and accounting matters, and applying analytical and other review procedures. A review issubstantially less in scope than an audit conducted in accordance with Australian Auditing Standardsand consequently does not enable us to obtain assurance that we would become aware of all significantmatters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Independence
In conducting our review, we have complied with the independence requirements of the CorporationsAct 2001.
Ernst & Young
R J Curtin L A CarrPartner PartnerAdelaide22 August 2018
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APPENDIX 4DFOR THE SIX MONTHS ENDED 30 JUNE 2018
For ‘Results for Announcement to the Market’ refer to page 1 of this Half-year Report
NTA BACKING
30 June 2018 30 June 2017
Net tangible asset backing per ordinary security N/A N/A
CHANGE IN OWNERSHIP OF CONTROLLED ENTITIES
The following companies have been approved for sale during the six months ended 30 June 2018:
Santos Asia Pacific Pty LtdSantos (SPV) Pty LtdSantos (Madura Offshore) Pty LtdSantos (Sampang) Pty LtdSantos Sabah Block R Pty LtdSantos Petroleum Ven tures B.V.Santos Vietnam Pty Ltd
DETAILS OF JOINT VENTURE AND ASSOCIATE ENTITIES
Percent ownership interest
held at the end of the period30 June 2018 30 June 2017
% %
Joint venture entities
Darwin LNG Pty Ltd 11.5 11.5
GLNG Operations Pty Ltd 30.0 30.0
GLNG Property Pty Ltd 30.0 30.0
Lohengrin Pty Ltd
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Papua New Guinea Liquefied Natural Gas Gl obal Company LDC
13.5 13.5
1 company deregistered on 7 May 2017.