MBA403 Financial Analysis Report: Santos Limited Performance

This report presents a financial analysis of Santos Limited's performance for the financial year 2018, focusing on key financial and non-financial indicators. The analysis reveals an 18% revenue growth and a significant 51% increase in operating profits (EBITDAX), alongside a positive shift from a net loss in FY2017 to a profit after tax in FY18. The report highlights the impact of rising oil and LNG prices on revenue and profit margins. The analysis also addresses the increase in the debt-equity ratio and the positive development of improved proven reserves, which are crucial for future earnings. The report concludes by emphasizing the improved financial performance driven by higher commodity prices, while also acknowledging concerns regarding the rising gearing ratio, which needs careful monitoring. The report references the company's annual report and relevant financial literature to support its findings.

FINANCIAL AND ECONOMIC INTERPRETATION
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Santos Limited has been chosen for this task with the latest annual report being available for
FY18 i.e. for the period ending on June 30, 2018. The given report is addressed to an internal
user who is the relevant stakeholder here.
Executive Summary
The report has analysed the performance of Santos Limited for the financial year 2018 using
both financial and non-financial indicators. The financial indicators reflecting operational
profitability have shown improvement on account of better prices for oil and LNG. The
proven reserves of the company have also improved in FY18 which is a key non-financial
indicator since it has implications for future earnings of the company. The main cause of
concern is the rising debt equity which going forward the company would need to ensure
remains within limits.
Analysis
One of the key parameters for financial performance is the growth in revenue which is 18%
in FY18. However, the jump in operating profits (i.e. EBITDAX) for the company increased
by 51%. In the previous year (i.e.FY2017), net loss was posted by the company to the tune of
USD 360 million as against a profit after tax of USD 630 million in FY18. With regards to
the balance sheet of the company, the liabilities have shown significant jump which has led to
a jump in debt equity ratio from 0.9 as on June 30, 2017 to 1.2 as on June 30, 2018 (Santos,
2018).
In relation to non-financial indicator of performance, the proved reserves is a crucial metric
which has shown improvement as proven reserves have increased by 25% on a y-o-y basis.
The cumulative reserves (i.e. probable and proved) have increased by 20% from FY17 to
FY18. The production volume and sales volume of the company saw a marginal decline to
the tune of 1% and 6% respectively (Santos, 2018).
Interpretation
The revenue growth of the company has been facilitated by the rising price realisation for the
company products (i.e. oil and LNG) as the volumes have shown a marginal decline only.
The business of the company is such that the revenues are quite sensitive to the underlying
changes in price of the underlying commodities in which the company deals in. Continuation
of high prices for the products would sustain these higher profits. The higher prices have led

to improvements in the profit margins visible at EBITAX and net profit level. Since the cost
of the miners remains mostly independent of the underlying price of the commodity, hence a
significant portion of realisations are reflected in the profits leading to a surge in margins.
The profits in FY17 were also adversely impacted by the impairment charges which were
absent in FY18. However, these charges were also related to lower realisation in oil and LNG
(Santos, 2018).
The financial indicators do indicate superior performance of the company in FY18 when
compared to the previous year. However, it must be understood that there has not been any
major turnaround in the company since the improved financial indicators are driven by higher
price of the company’s products (Parrino and Kidwell, 2014). The future earnings of a
mining company would be dependent on the future reserves which must be strong so as to
provide future earnings visibility. In this backdrop, the proven and other reserves for the
company become significant. The rise witnessed in these reserves in FY18 clearly is a
positive development from the perspective of future earnings (Brealey, Myers and Allen,
2014). Also, the production volumes is a critical non-financial performance indicator since it
directly influences revenue and indirectly the profitability. In terms of volume, the
performance has seen only a marginal dip in FY18. A financial indicator which reflects some
concern for the business would be the deterioration of gearing ratio which can be detrimental
especially in an environment where the prices of oil and LNG are falling. This may result in
losses and may have to be written off against the equity as happened in FY17 (Petty et. al.,
2016).
Conclusion
The analysis and interpretation of the performance of the business clearly reflects that the
company has clocked a significantly improved financial performance in FY18 when
compared with FY17 as the company realised losses in that year. This improvement has been
driven from the increase in prices of oil and LNG even though the offtake volumes have
shown a minor dip. On the non-financial side, a positive aspect for the business is the rise in
reserves which provides visibility for future business. However, some concern is faced by
the business on account of deterioration in gearing ratio which even though does not pose
immediate issue today, may do so going forward when the prices are soft. As a result, this
should be kept under check.

References
Santos (2018), Annual Report FY2018, Retrieved from
https://www.santos.com/media/4651/2018-annual-report.pdf
Brealey, R.A., Myers, S.C. and Allen, F. (2014) Principles of corporate finance. 2nd ed. New
York: McGraw-Hill Inc.
Parrino, R. and Kidwell, D. (2014) ,Fundamentals of Corporate Finance,4th ed., London:
Wiley Publications
Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin J.D. and Burrow, M.(2016),
Financial Management: Principles and Applications 6th ed. Sydney: Pearson
Australia