Oil and gas producer Santos has flagged higher dividends as it prepares to boost production.

Santos expects to double its earnings and operating cash flow over the next two years as the Papua New Guinea liquefied natural gas (PNGLNG) and Gladstone LNG (GLNG) projects commence production.

Chairman Ken Borda said this would allow the company to return more cash to shareholders as it strikes a balance between higher dividends, debt repayment and investing in growth.

“Santos will adopt a progressive dividend policy,” Mr Borda said as the company posted a profit of $516 million for calendar 2013.

“As our production and earnings grow, we intend to initially increase the dividend per share to a level which is sustainable and then steadily increase or maintain our dividend each year.”

The PNG LNG project is 95 per cent complete and expected to deliver first gas in the third quarter of 2014, while GLNG is 75 per cent complete and on track for first LNG in 2015.

The company’s full year net profit was in line with the previous year’s result, as record sales revenue was offset by lower interest income and higher exploration costs.

It also reported a $28 million impairment cost, including revisions to the estimated cost of abandoning the Thevenard Island asset off the coast of Western Australia and an impairment of the Tintaburra asset in central Australia.

Sales revenue grew by 12 per cent from 2012, to a record $3.6 billion.

The company’s fully franked full year dividend was unchanged at 30 cents.

Santos shares dropped 68 cents, or 4.8 per cent, to $13.59.

The company maintained its 2014 production guidance at 52 to 57 million barrels of oil equivalent, and capital expenditure guidance remained at around $3.5 billion.

The company added that it’s well placed to meet increased east coast gas demand which is expected to triple.

Santos has gas reserves to last 27 years based on 2013 production numbers.