Santos shareholders are set to be rewarded after the gas producer's "near-death experience" with a resumption of dividends flagged for August, though some investors are disappointed with the miserly payouts under the new "sustainable" dividend policy.
The potential payout would be the first since February 2016 and would be up to a year earlier than some analysts were assuming.
But the policy – targeting a 10 to 30 per cent payout of free cash flow every year and additional returns "when business conditions permit" – implies only a 1-2 per cent yield, noted JPMorgan analyst Mark Busuttil.
Chief executive Kevin Gallagher has made strides to get the oil and gas producer back on track after its balance sheet was slammed by the oil price crash in 2014-15, when cash flows shrunk and debt soared. Costs of operations have been slashed, while some assets have been sold, most recently the Asian business for $US221 million. No dividends have been paid for more than two years as the board put the priority on reducing the debt pile.
But Santos confirmed on Thursday that it is on track to achieve its debt reduction target this December half, more than a year ahead of schedule. It noted it "now has a significantly stronger balance sheet to support the company's growth strategy".
Santos, which has a target to reduce net debt to $US2 billion by the end of 2019, is under pressure to justify its rejection last month of a $14.4 billion takeover approach from Harbour Energy.
"This positions the company to return to sustainable dividend payments to shareholders," the company said.
Still, Santos investor Romano Sala Tenna at Katana Capital said he was "a bit disappointed" with the policy, pointing to a "quite low" ratio of 10-30 per cent, against a measure of free cash flow rather than underlying profit, which was "onerous" for an oil and gas company.
"It's a good starting point," said Mr Sala Tenna, who noted he had been expecting a dividend to be declared in August given Santos's progress in reducing debt, helped by higher oil prices, cost reductions and asset sales.
"I've got a lot of respect for what Kevin's team has done, and they are also just a year or so this side of a near-death experience – people don't tend to be heroes when they're just coming out of the operating theatre – but as a sustainable policy I would like to see it evolve over time."
Santos shares still rose 2.6 per cent to $6.28, just 2.5 per cent below the $6.44 high they reached before the rejection of the bid from US-based Harbour.
Additional returns to shareholders beyond that will be considered "when business conditions permit," said Santos.
RBC Capital Markets analyst Ben Wilson said the new policy suggested dividends would resume sooner than he anticipated but at a lower level. RBC had been assuming a 40 per cent payout ratio on net income, starting in the second half of 2019.
JPMorgan said it now expects Santos to pay a 4¢ per share dividend in 2018 and 7¢ per share in 2019, equating to a "modest" 1-2 per cent yield.
Santos said that in deciding the payout, its board would consider growth projects, cash flow and funding requirements, as well as the strength of the balance sheet, capital structure and franking credit balance.
"Should market conditions remain supportive and the company continues to make good progress to its debt reduction target ahead of plan, the board will look to restore dividends to shareholders when it considers the 2018 half-year financial results in August."
The company has several growth opportunities ahead of it, including the circa $5 billion Barossa gas project off the northern coast, and a potential acquisition in Papua New Guinea, where Santos is also involved in an LNG expansion.
Analysts disagreed on the implications of the new policy on growth.
JPMorgan's Mr Busuttil said he saw no change in the outlook given "limited" near-term capex requirements with no major projects due to get the go-ahead until 2019.
But Mr Wilson said the new policy "tilts towards growth" and ensures Santos has ample flexibility to pursue that.
"Following the rejection of the Harbour Energy bid for control of the company, the focus on generation of value thorough execution of growth opportunities is now necessarily sharper," he said.
STO Price at posting:
$6.38 Sentiment: Buy Disclosure: Held
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