Australian company’s write-down of assets relied on optimistic prediction for how oil price will change, according to financial activist group

This article is more than 4 years old

This article is more than 4 years old

Santos, one of the companies driving Queensland’s liquefied natural gas export boom, is relying on price projections so optimistic that they inflate the value of the company’s assets by billions of dollars, according to a leading analyst.

This month Santos announced a write-down of the value of its Gladstone gas export project, GLNG, of US$1.5bn. The value of the project dropped because the price it gets for the exported gas is tied to the price of crude oil, which has dropped.

But according to an analysis by the pro-renewables financial activist group Market Forces, that write-down of its assets relied on an optimistic prediction for how the oil price will change, with Santos’s projections significantly higher than those of competitors Woodside and Beach Energy, brokers such as Deutsche Bank and Goldman Sachs, as well as analysts at the World Bank.

According to Santos’s own explanation of how its asset’s value is tied to oil prices, if it had used Goldman Sachs’ projected oil prices rather than its own optimistic ones, the value of its assets would be US$3.5bn less in 2020.

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Alternatively, if it followed the World Bank’s forecast to 2020, its assets would take more than a US$2bn hit that year.

Even its peers in the market, Woodside Petroleum and Beach Energy, projected oil prices to 2021 that would result in Santos’s assets taking more than a US$1bn write-down most years.

Santos’s write-downs have led some analysts to speculate that parts of the brand-new facility would be mothballed within a year or two.

The latest company update from Goldman Sachs on Santos recommended investors sell their stock in the company, noting long-term expectations for the price of oil.

Santos declined Guardian Australia’s request to comment on the issue.

“It just seems fanciful,” said Daniel Gocher from Market Forces, who prepared the analysis. “They’re a good $5 to $15 above the median forecast price per barrel.

“The comparison is pretty representative – we’ve got the brokers in there, and the World Bank, who you’d think would be rather conservative. And we’ve also got their peers.

“There is plenty of opinion out there that says that they’re on thin ice already,” Gocher said, adding that Santos had more debt than similar companies in the market. “If they’re not getting the prices for gas that they were expecting, then they’re going to find it harder to meet their debt obligations.”

Santos now has the lowest investment-grade credit rating of BBB-. When the company declared its recent write-down, the rating agency Standard & Poor’s said if oil prices stayed low, Santos could start selling its assets to meet its debt obligations.

Bruce Robertson from the pro-renewables financial analysis group, the Institute for Energy Economics and Financial Analysis, said if Santos did declare a multibillion-dollar write-down, it “would be in all sorts of trouble”.

“In my opinion it would make financing of the business very problematic,” Robertson said.

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He said the large discrepancy in forecasts showed Australia needed consistent reporting of the value of gas reserves and resources, as in the US.

The inconsistent reporting made it hard for investors to judge the value of a company, he said, but it also made it hard for policymakers to judge how large the country’s available reserves were. “There’s no transparency or consistency. Each company is calculating reserves and resources using a different set of assumptions.”

Gocher said Santos’s “fanciful” projections pointed to the over-investment in the LNG sector in Australia. “A lot of those investments will be in jeopardy and wouldn’t get the go-ahead today if they were making the same decision now,” he said.