February 20, 2018 / 10:44 PM / 3 months ago

UPDATE 2-Australia's Santos profit soars, flags China LNG sales push

* Annual profit rockets to $336 mln, misses forecasts

* In better position to revive dividend

* LNG joint venture with ENN to tap China demand growth

* Shares fall 2.7 pct (Adds CEO comments)

By Sonali Paul

MELBOURNE, Feb 21 (Reuters) - Santos Ltd, Australia’s No. 2 independent gas producer, reported a more-than-fivefold rise in annual underlying profit on Wednesday, and flagged it may soon be in a position to revive its dividend and embark on growth.

Two years of deep cost cuts and a rebound in oil and gas prices have helped Santos escape from a massive debt overhang and put it in a better position to fend off predators, like private equity-backed Harbour Energy.

Chief Executive Kevin Gallagher said the company has had no further contact with Harbour since it rebuffed a A$9.5 billion offer last year, and noted that its share price was now above the tentative A$4.55 a share offer.

“We can’t shrink our way to success,” Gallagher told analysts on a conference call, pointing to opportunities to develop its existing assets in Australia and Papua New Guinea.

Santos is also looking to beef up ties with its top shareholder, China’s ENN Group, and is in talks to set up a trading joint venture to sell liquefied natural gas (LNG) to China, the world’s fastest growing gas market.

“With an end user like ENN, we see that as a marriage made in heaven,” Gallagher said.

Santos is hoping to use its relationship with ENN to tap other end users in China, which last year overtook South Korea to become the world’s no.2 LNG importer.

Santos’ underlying profit for 2017 rose to $336 million from $63 million a year earlier, thanks to cost cuts, higher sales volumes and higher oil and gas prices.

The result was below analysts’ forecasts around $349 million that analysts, according to Thomson Reuters I/B/E/S. UBS put the miss down to bigger than expected foreign exchange losses.

Santos shares fell 2.2 percent to A$5.065, underperforming a small gain in the broader market.

Tribeca Investment Partners analyst James Eginton said the fall was due partly to the earnings miss and possibly because Gallagher said there had been no contact with Harbour.

For predators eyeing Santos, the big prize would be its stake in the PNG LNG project, run by ExxonMobil Corp, in Papua New Guinea, which is set to double exports under a plan broadly agreed by the project partners.

Gallagher said Santos is looking to buy into one of the gas fields, P’nyang, that is set to supply the PNG LNG expansion to match its 13.5 percent equity stake in the project.

Santos could also revive its dividend this year, given net debt is on track to fall below $2 billion by end-2018, a year ahead of target, but the company would stay disciplined.

“I don’t think we want to be jumping ahead of ourselves and drinking our own Kool-Aid until we get there,” he said. (Reporting by Sonali Paul; additional reporting by Aaron Saldanha in Bengaluru; editing by Richard Pullin)

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