Australia's Santos year profit down 17 pct, costs bite

MELBOURNE, Feb 21 (Reuters) - Santos Ltd STO.AX , Australia's second biggest oil and gas producer, reported a 17 percent fall in annual underlying profit on Friday, missing market forecasts as costs rose.

While investors are focused on challenges Santos is facing on its biggest growth project, the $18.5 billion Gladstone liquefied natural gas (LNG) project due up in 2015, the company is set to benefit this year from first exports at the Papua New Guinea LNG project.

The PNG LNG project, in which it owns a 13.5 percent stake, is due to start in the third quarter and will help increase the group's production to between 54 and 57 million barrels of oil equivalent (mmboe), from 51 mmboe last year.

"Our operating cash flow will more than double over the next two years as the PNG LNG and GLNG projects come on-line. We are focused on rewarding shareholders as we strike a balance between higher dividends, debt repayment and ongoing investment for growth," Santos CEO David Knox said in a statement.

Underlying profit fell to A$504 million ($453 million) in 2013 from A$606 million a year earlier. Analysts on average had expected an underlying profit of A$553 million, according to Thomson Reuters I/B/E/S.

Santos shares last traded at A$14.27, having climbed 13 percent over the past year, about double the gain in the broader market . ($1 = 1.1134 Australian dollars)

(Reporting by Sonali Paul; Editing by Richard Pullin)

((Sonali.Paul@thomsonreuters.com)(+61 3 9286 1419)(Reuters Messaging: sonali.paul.thomsonreuters.com@reuters.net))

Keywords: AUSTRALIA SANTOS/RESULTS