The oil price assumptions on which Australia’s second-largest independent oil and gas producer Santos bases its accounts have been overly optimistic every year since 2014, finds a new briefing note by the Institute for Energy Economics and Financial Analysis (IEEFA)
Santos has consistently adopted oil price assumptions that are too high
In IEEFA’s opinion, Santos’ latest accounts to be voted upon on 3 April 2020 and signed off by auditors Ernst & Young once again do not represent a “true and fair” view of the companies’ financial and resource position.
Author of the note Bruce Robertson, IEEFA’s gas/LNG analyst says since 2014, Santos has consistently adopted oil price assumptions that are too high, leading to an over-valued balance sheet.
“THIS HAS VERY SERIOUS IMPLICATIONS FOR AUDITORS, INVESTORS, AND ALSO FOR GOVERNMENT BACKERS,” says Robertson.
“Santos’ latest proposed gas development for fracking in Narrabri is currently before the NSW Independent Planning Commission for final determination, following the Federal government’s pledge to push the project in partnership with the NSW government.
“Is the government aware that the company’s balance sheet is based on over optimistic oil price assumptions?” asks Robertson.
Santos’ over optimistic oil price assumptions happen every year
Since 2014 Santos has written off close to $7 billion on unconventional gas and its LNG plants at Gladstone Queensland which have never run at full capacity. Its Gladstone LNG plants saw budget blow-outs and its CSG fields, also in Queensland, have failed to perform as expected.
Robertson says Santos’ over optimistic oil price assumptions happen every year.
“This is a major deal for investors and bankers, as it impairs their ability to assess the true financial situation of the company,” says Robertson.
“And it’s a serious question for auditors who are signing off on these numbers as being ‘true and fair’.”
Robertson found that in Santos’ 2014 Annual Report, forecast oil prices for 2019 were US$90/barrel, 41% above the actual price. In its 2015 and 2016 Annual Reports, forecast oil prices for 2019 were US$80.77/barrel, 26% above the actual price.
Looking forward from the 2019 Annual Report, the oil price forecasts are again hugely optimistic. The 2025 forecast is 58% above the futures market price for that year.
THE 30 YEAR AVERAGE FOR OIL PRICES IS $49/ BARREL, YET SANTOS ARE STARTING WITH A HIGH PRICE in its 2019 annual report of $64/barrel, and then increasing it by twice the rate of inflation.
“All of this is happening when we are in an environment when the growth in oil consumption is being challenged by the increasing electrification of transport,” says Robertson.
“There doesn’t need to be much electrification for it to take much market share which will further depress oil prices, as all major vehicle manufacturers are expanding their electric vehicle production substantially.”
Santos is just one example of a much broader issue
Robertson suggests Santos is just one example of a much broader issue – the incomparability of Australia’s oil and gas sector due to the use of different oil prices and currency rates.
Essentially, for example, a barrel of oil listed on Santos’ accounts is not the same as a barrel of oil listed on Origins accounts. Oil and gas reserves in Australia are assessed as proved or probable based on their economics. Different oil price and currency assumptions give different results.
In the U.S. they have a simple way of resolving this, with the SEC mandating the prices based on the average prices of oil in the last 12 months, and that’s the price at which every company must set their asset value. That way oil and gas accounts are prepared on a consistent basis.
“SURELY THIS IS THE WAY FORWARD FOR AUSTRALIA, to avoid the confusion caused by the use of different oil prices in company accounts,” says Robertson.
Shareholders and the Australian and NSW government need to be aware of the inflated figures
“In essence the oil price assumptions on which Santos bases its accounts have been very aggressive every year since 2014. High oil price assumptions inflates the companies reserves and resources, and its asset values.
“If more realistic assumptions are used there would have been be substantial asset write-offs and reserves and resources would have been materially lower.
“In IEEFA’s opinion, Santos’ 2019 accounts contain material inaccuracies in asset values, and the resources that the company relies upon to produce profit are overstated.
“Shareholders and the Australian and NSW government need to be aware of the inflated figures and seriously reconsider their position.”
Read the briefing note: Santos’ Accounts Are Not “True and Fair”, Oil Price Assumptions Are Too High
Media Contact: Kate Finlayson ([email protected]) +61 418 254 237
Author Contact: Bruce Robertson ([email protected])
About IEEFA: The Institute for Energy Economics and Financial Analysis (IEEFA) conducts research and analyses on financial and economic issues related to energy and the environment. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy. (www.ieefa.org)