MELBOURNE, Oct 21 (Reuters) - Santos Ltd STO.AX reported a 10 percent rise in sales revenue in the September quarter from the previous quarter on flat production, and said on Friday it has started hedging oil prices to help limit volatility and support capital spending plans.
Shoring up capital spending is key for the oil and gas producer as it needs to drill hundreds of coal seam gas wells to supply its Gladstone liquefied natural gas (LNG) plant, amid concerns that the wells are not as productive as it had hoped.
The company took a $1 billion writedown on the Gladstone LNG project in August, as weak oil prices have forced it to cut spending on coal seam gas drilling and pay up for gas from other producers to feed the plant, hurting returns on the project.
Santos said it has hedged 7.3 million barrels of oil in 2017 under a structure capping its realised price at $62.39, and earn it the Brent crude price plus $10 if oil prices fall below $40. Brent LCOc1 has traded between $37 and $54 this year.
"Our decision to commence oil price hedging reflects our desire to reduce the effect of commodity price volatility," Santos Chief Executive Kevin Gallagher said.
Third quarter production was steady at 15.5 million barrels of oil equivalent (mmboe), roughly in line with two analysts' forecasts, while revenue rose to $650 million from the June quarter, about 5 percent below forecasts.
Santos narrowed its production forecast for 2016 to between 60 and 62 mmboe, and its sales volume forecast to between 81 and 83 mmboe, both at the higher end of its previous guidance.
It cut its production cost guidance by a further 50 cents to $9.00-$9.50 a barrel and cut its forecast for capital spending this year by about 7 percent to $700 million.