The Santos Ltd (ASX: STO) share price is in the red even though the ASX oil and gas share just revealed a major upgrade to its payouts.
Bigger cash returns to shareholders
Santos reiterated that it wants to maintain a disciplined, low-cost operating model that is “designed to deliver strong cashflows through the commodity cycle”.
The idea is to balance capital between investment in the business to backfill projects, decarbonisation projects, the development of growth and clean fuel projects, and providing shareholders with sustainable returns based on the generation of free cashflow.
Santos said the policy will be to pay out at least 40% of free cashflow from operations generated each year, excluding “major growth”.
Returns to shareholders will be paid through cash dividends and/or share buybacks, subject to market conditions and the board’s discretion.
It will still target a gearing range – how much debt it has compared to the size of the business – of between 15% to 25%.
Bigger ongoing share buyback
Santos revealed that it was doubling the size of its share buyback. In August it announced a US$350 million buyback, and it just increased it by US$350 million.
The extra on-market buyback is expected to start in December.
Leadership explanation
The chair of Santos, Keith Spence, explained that Santos is making a lot of profit at the current commodity prices, which also reflects confidence in the outlook for the company:
“In addition, the Board shall give consideration to additional shareholder returns from any net proceeds derived from asset divestments through portfolio optimisation once those divestments reach completion and proceeds have been received.
Once the Barossa and Pikka Phase 1 projects commence production, the Board’s intention is to consider increasing shareholder returns to at least 50 per cent of free cash flow generated per annum.
Summary thoughts on the Santos share price
Santos is raking in a lot of cashflow at the moment, so it’s good to see that more of it is coming back to shareholders. There’s a question of whether this is the right time to be buying back shares – when the Santos share price and oil price have risen this year – but it’s better than nothing.
It may makes sense to buy Santos shares at the moment, it’s only up 8% in 2022 to date, so it doesn’t reflect much of the commodity gains. But, what would cause energy prices to jump higher from here? I’m not sure.
