Updates shares in paragraph 2, adds details on future growth options in paragraphs 11-13

By Himanshi Akhand and Christine Chen

SYDNEY, Feb 19 (Reuters) - Australian oil and gas producer Santos STO.AX reported a steeper-than-expected drop in annual profit and slashed its dividend by 41% on Wednesday, but remained confident it was reaching an "inflection point" as major growth projects neared completion.

Santos shares sank 4.5%, underperforming a 0.7% fall in the benchmark S&P/ASX 200.

Its underlying profit fell nearly 16% to $1.2 billion for the 12 months to December 2024, below the Visible Alpha consensus of $1.32 billion. It declared a final dividend of 10.3 cents per share, down from 17.5 cents a year earlier.

The country's no.2 independent gas producer attributed the earnings decline to lower oil and gas prices, supply chain disruptions, and slowing demand in China.

Lower gas output in Western Australia and declining volumes from the Bayu-Undan field in the Timor Sea weighed on production, which totalled 87.1 million barrels for the year.

However, CEO Kevin Gallagher and chair Keith Spence told investors that Santos would begin to see returns from its Barossa gas and Pikka oil projects after a heavy investment cycle.

“As Santos reaches an inflection point in 2025, with new production to come online, we will remain focused on driving our low cost disciplined operating model to deliver free cash flow to drive shareholder returns,” they said in a statement.

Santos said its $4.3 billion Barossa project, long-delayed due to concerns over its impact on Indigenous communities, was now 91% complete and on track to deliver first gas in the September quarter of this fiscal year.

The Adelaide-based company also said it was seeing "strong progress" at the Pikka phase one project in Alaska, with first oil on track for mid-2026. An early start-up was also possible subject to weather and logistics, it said.

Gallagher told investors that annual production would be boosted by over 30% in two years with Barossa and Pikka coming online.

The projects, alongside a $100 million-$150 million cost-cutting plan, would free up cash to pursue “high quality” backfill and sustainable growth options, the company said.

Santos said it planned to start appraisal drilling in 2026 for shale gas in the Beetaloo Basin in northern Australia, which could supply either its Gladstone Liquefied Natural Gas $(GLNG)$ or the Darwin Liquefied Natural Gas $(DLNG)$ plant.

In Papua New Guinea, it said it was aiming for final investment decisions in the next 12-14 months on the Papua LNG and P’nyang gas projects and the Agogo Production Facility tie-in project that would supply gas to PNG LNG.

Santos has said it will distribute 60% of free cash flow to shareholders from 2026, up from its previous dividend policy of returning 40%.

($1 = 1.5760 Australian dollars)

(Reporting by Himanshi Akhand and Adwitiya Srivastava in Bengaluru and Christine Chen in Sydney; Editing by Shilpi Majumdar, Varun H K and Sonali Paul)

((Himanshi.Akhand@thomsonreuters.com))