UPDATE 2-Santos shares drop on profit fall, output downgrade

(Adds details, CEO and analyst's comments)

By Fayen Wong

SYDNEY, Feb 21 (Reuters) - Santos Ltd (STO.AX: Quote, Profile, Research, Stock Buzz), Australia's third-largest oil and gas producer, posted a bigger-than-expected 28 percent drop in annual profit and cut its 2008 output forecast, knocking 11 percent off its share price.

Santos said it expected 2008 output of 56-58 million barrels of oil equivalent (boe), down from an August estimate of 59-61 million boe and lower than its 2007 output of 59.1 million boe.

The production downgrade was due to a scale back of a program to increase output from its ageing Cooper Basin fields in South Australia, as well as technical issues at its Mutineer-Exeter field, which has cut production to 4,000-5,000 barrels per day (bpd), about a tenth of its usual output.

"You've got worse-than-expected results, a production downgrade and higher cost pressures. All these are not a good mix at all," said Andrew Blakely, resource analyst at Macquarie Group.

Adelaide-based Santos said it expects to return to production growth in 2009. It saw a further increase in 2010, boosted by a ramp up of its coal seam gas production and from new projects, such as its Henry and Reindeer gas projects in Australia as well as its Blackbird oil project off Vietnam.

Santos posted profit before one-off items of A$485.1 million ($445 million), below expectations of A$567.1 million in a poll of nine analysts by Reuters Estimates.

Reported net profit including one-offs fell 31.5 percent to A$440.6 million, its second consecutive year of decline.