Is Santos (ASX:STO) Poised for a Rebound After Its Recent Profit Slump and Job Cuts

Key Takeaways

• Santos is undergoing a significant operational reset, cutting 10% of its workforce and initiating a strategic portfolio review to enhance efficiency and cash flow.
• Despite a 25% slump in FY25 underlying profit to US$898 million due to softer commodity prices, the company generated robust US$1.8 billion in free cash flow, signaling underlying financial strength.
• With major projects like Barossa and Pikka Phase 1 nearing completion, Santos is shifting from a capital-intensive build phase to a harvest-and-optimize phase, targeting increased production and shareholder returns.

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Is Santos (ASX:STO) Poised for a Rebound After Its Recent Profit Slump and Job Cuts?

Santos (ASX:STO), one of Australia’s largest independent energy producers, recently announced a significant restructuring, including a 10% workforce reduction, following a notable slump in its full-year 2025 profit. This move, impacting approximately 400 roles out of 4,028 employees, is a direct response to a challenging commodity price environment and a strategic pivot as the company’s major growth projects transition from development to production. While the headline figures of a 25% drop in underlying profit to US$898 million might initially concern investors, a deeper dive reveals a company actively repositioning itself for a "cash flow reset" and improved shareholder returns.

The profit decline, which saw net profit fall by 33% to 35% from the prior year, was largely attributed to softer oil and gas prices that offset a modest increase in production. Sales revenue also dipped 8% year-on-year to US$4.93 billion. However, management highlighted that the full-year result reflected the strength of Santos’ business model, driven by a disciplined, low-cost approach. The company achieved unit production costs of US$6.78 per barrel of oil equivalent (boe), marking its lowest level in a decade and underscoring a strong focus on cost discipline even amidst revenue pressures. This proactive cost management, coupled with the strategic job cuts, suggests a determined effort to restore profitability and optimize its operational footprint.

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How Will Santos' Restructuring Drive Cost Efficiency and Free Cash Flow?

Santos' decision to cut 10% of its workforce, alongside a strategic review of its Australian integrated oil and gas portfolio, is a clear signal of management's commitment to aggressive cost reduction and operational efficiency. This move comes as the company transitions its major growth projects, such as the Barossa gas project and the Pikka Phase 1 development in Alaska, from peak capital expenditure into production. The goal is to "rightsize the business" as these projects become part of the "base business," thereby lowering forecast operating costs and boosting free cash flow.

The company's focus on cost discipline is already evident in its impressive unit production costs of US$6.78 per boe for FY25, the lowest in a decade. This metric highlights an underlying operational strength that can be further enhanced by the announced headcount reductions. Analysts view these cuts positively, anticipating a material improvement in the company's cost structure. Furthermore, the strategic review of its Australian assets could lead to divestments of non-core holdings, allowing Santos to sharpen its portfolio focus and unlock additional capital. This capital could then be redeployed into higher-return opportunities or returned to shareholders, reinforcing the company's commitment to disciplined capital allocation.

The anticipated reduction in capital intensity as major projects come online is expected to free up substantial cash flow. Santos generated a robust US$1.8 billion in free cash flow from operations in FY25, despite the challenging pricing environment. With Barossa and Pikka ramping up, and capital expenditures expected to normalize, a greater proportion of operating cash flow should convert into free cash flow. This shift is critical for an income-oriented holding like Santos, as it underpins dividend sustainability and creates room for potential share buybacks, enhancing overall shareholder returns.

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What Do the Major Project Deliveries Mean for Santos' Production and Growth Outlook?

The completion and ramp-up of Santos' major growth projects, particularly Barossa and Pikka Phase 1, mark a pivotal inflection point for the company, shifting it from a capital-intensive build phase to a harvest-and-optimize phase. The Barossa gas project, a cornerstone of Santos' future LNG supply, saw its first LNG cargo loaded at Darwin in early 2026. This milestone is crucial as Barossa is expected to underpin long-term LNG supply through the Darwin LNG facility, providing stable, contracted volumes to Asian markets.

Concurrently, the Pikka Phase 1 development in Alaska is targeting first oil in the first quarter of 2026, with drilling nearing completion. Once fully operational, Barossa LNG and Pikka Phase 1 are projected to collectively boost Santos' production by approximately 25% to 30% by 2027 compared to 2024 levels. This significant increase in output is a direct result of years of substantial investment and is expected to drive future revenue growth, even if commodity prices remain volatile. The company's production forecast for 2026 stands at 101 to 111 million barrels of oil equivalent (mmboe), a notable increase from the 87.7 mmboe produced in 2025.

This transition is not just about volume; it's about improved capital efficiency. As these projects move into production, capital expenditures are expected to decline from the US$1.95 billion to US$2.15 billion guided for 2026. This reduction in capital intensity, combined with the increased production, should lead to a material improvement in return on invested capital. For investors, this signals a more predictable and robust cash flow generation profile, moving beyond the "peak capital investment phase" and positioning Santos for stronger shareholder returns.

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How Strong is Santos' Balance Sheet and What Are the Implications for Shareholder Returns?

Santos’ balance sheet has been a focal point for investors, particularly during its period of elevated capital spending on major projects. Despite these heavy investments, the company has maintained a manageable leverage profile, ending FY25 with gearing at 26.9%, or 21.5% excluding leases. This strengthened balance sheet is a testament to disciplined financial management and strategic actions taken during the year.

The company proactively enhanced its financial flexibility by issuing US$1 billion in new fixed-rate bonds and fully repaying its legacy PNG LNG project finance facility. Additionally, divestments of non-core assets and the receipt of Fluor settlement proceeds further bolstered liquidity and sharpened the portfolio's focus. These measures have reinforced the strength of Santos’ financial position, providing a solid foundation as it enters a new phase of operations.

Looking ahead, the expected improvement in free cash flow generation, driven by declining capital intensity and increased production from Barossa and Pikka, is set to significantly enhance Santos' capacity for shareholder returns. For FY25, the company declared total dividends of US23.7 cents per share, returning US$770 million to investors. While the final dividend of 10.3 US cents per share was in line with FY24 but below market consensus, management highlighted a 13.6% compound annual growth rate in dividends per share since 2018. With a strengthened balance sheet and a target to return at least 60% of all-in free cash flow to shareholders over time, Santos is positioning itself as a disciplined, cash-generating energy producer focused on consistent and visible returns, which should appeal to income-oriented investors.

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What Are the Key Risks and Opportunities for Santos in the Current Market?

Santos operates in a dynamic global energy market, presenting both significant opportunities and inherent risks. On the opportunity side, the company is well-positioned to capitalize on robust demand for liquefied natural gas (LNG) in Asia-Pacific markets, driven by energy transition dynamics and the need for reliable baseload power. The Barossa project's long-term LNG supply through Darwin, coupled with increased production from Pikka, provides a strong foundation for future revenue streams, often underpinned by long-term contracts that offer a degree of price stability. Furthermore, Santos' growing focus on carbon capture and storage (CCS) projects, like the successful Moomba CCS, positions it favorably in a decarbonizing world, offering a pathway to reduce emissions and potentially generate new revenue from CO2 storage services. The company added 24 million tonnes of 2C CO2 storage in FY25, highlighting its commitment to this segment.

However, several risks loom large. Commodity price volatility remains a primary concern; the 25% profit slump in FY25 directly illustrates the impact of softer oil and gas prices. While Santos' low-cost operating model provides some resilience, prolonged periods of low prices could pressure margins and free cash flow. Execution risk, though mitigated by major projects nearing completion, still exists in ensuring these assets ramp up efficiently and on budget. Regulatory and environmental challenges also persist, as evidenced by past legal battles over "clean energy" claims, which, while dismissed, underscore ongoing scrutiny from activist groups and evolving environmental standards. Geopolitical instability in key operating regions or global energy markets could also disrupt operations or demand.

The strategic review of its Australian portfolio, while an opportunity for optimization, also carries the risk of asset impairment or less-than-optimal divestment terms if market conditions are unfavorable. Investors must weigh these factors carefully, recognizing that while Santos is entering a more stable, cash-generative phase, it is not immune to external market forces or operational hurdles.

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What Does This Mean for Investors Considering Santos Stock?

For investors, Santos' recent announcements paint a picture of a company in transition, moving from a heavy investment cycle to a phase focused on cash generation and shareholder returns. The profit slump and job cuts, while initially concerning, are strategic maneuvers designed to optimize the business for a future of lower capital intensity and higher free cash flow. With major projects like Barossa and Pikka coming online, production is set to increase significantly, underpinning a more robust financial outlook.

The company's strengthened balance sheet and commitment to returning at least 60% of all-in free cash flow to shareholders suggest a compelling proposition for income-focused investors. While commodity price volatility remains a key risk, Santos' disciplined cost management and strategic pivot towards a "cash flow reset" position it as a potentially attractive long-term holding in the integrated oil and gas sector. The market's reaction to these changes will be closely watched, but the underlying fundamentals point to a more stable and rewarding phase ahead for Santos.

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