Company Reports

Santos is the second-largest Australian pure oil and gas exploration and production company (behind Woodside Petroleum, ASX:WPL), with interests in all Australian hydrocarbon provinces, Indonesia, and Papua New Guinea. Well-timed East Australian coal seam gas purchases and subsequent partial sell-downs bolstered the balance sheet and set the scene for liquid natural gas, or LNG, exports. Santos is now one of Australia's largest coal seam gas producers and continues to prove additional reserves. It is the country's largest domestic gas supplier.

Australia’s second-largest oil and gas firm no-moat Santos reported an 18% decline in first-half 2024 underlying net profit after tax to USD 654 million. This was 7% below our USD 703 million expectations, though we read no longer-term implication—our midcycle estimates are intact. Higher-than-anticipated depreciation caused the miss, with PNG assets attracting additional due to the removal of held-for-sale recognition. Net operating cash flow was ahead of our expectations, up 29% to USD 1.8 billion.

Our fair value estimate for no-moat Santos rises 2% to AUD 12.50 per share, chiefly on the time value of money. Shares remain materially undervalued in 4-star territory, with effective delivery of the Barossa and Pikka projects the key potential catalysts for price appreciation toward fair value. Excellent news then is continuing rapid second-quarter progress on these major developments. Barossa and Pikka remain on schedule for production in 2025 and 2026, respectively.

Santos is the second-largest Australian pure oil and gas exploration and production company (behind Woodside Petroleum, ASX:WPL), with interests in all Australian hydrocarbon provinces, Indonesia, and Papua New Guinea. Well-timed East Australian coal seam gas purchases and subsequent partial sell-downs bolstered the balance sheet and set the scene for liquid natural gas, or LNG, exports. Santos is now one of Australia's largest coal seam gas producers and continues to prove additional reserves. It is the country's largest domestic gas supplier.

No-moat Santos reported a robust first-quarter 2024 operating result, with production and revenue down 7% and 6% to 21.8 million barrels of oil equivalent, or mmboe, and USD 1.4 billion, respectively, in line with our expectations. We have made no change to our AUD 12.30 fair value estimate. The production decline reflects the anticipated depletion of the Bayu-Undan gas field and planned maintenance, as well as unplanned shutdowns due to cyclone activity in Western Australia. It was creditable that expectations were still met despite the weather.

Santos is the second-largest Australian pure oil and gas exploration and production company (behind Woodside Petroleum, ASX:WPL), with interests in all Australian hydrocarbon provinces, Indonesia, and Papua New Guinea. Well-timed East Australian coal seam gas purchases and subsequent partial sell-downs bolstered the balance sheet and set the scene for liquid natural gas, or LNG, exports. Santos is now one of Australia's largest coal seam gas producers and continues to prove additional reserves. It is the country's largest domestic gas supplier.

It was a strong 2023 result overall for no-moat Santos with USD 3.3 billion in net operating cash flow, ahead of our expectations. Australia’s second-largest oil and gas producer surprised with a USD 0.17 final dividend, up 16% and bringing the full-year total to USD 0.26, or AUD 0.40. That was considerably ahead of our AUD 0.26 target and equates to a meaningful 5.4% yield at the current share price, albeit unfranked. We had expected Santos to preference share buybacks to a greater degree at the expense of dividends.

Santos is the second-largest Australian pure oil and gas exploration and production company (behind Woodside Petroleum, ASX:WPL), with interests in all Australian hydrocarbon provinces, Indonesia, and Papua New Guinea. Well-timed East Australian coal seam gas purchases and subsequent partial sell-downs bolstered the balance sheet and set the scene for liquid natural gas, or LNG, exports. Santos is now one of Australia's largest coal seam gas producers and continues to prove additional reserves. It is the country's largest domestic gas supplier.

Over two months since first confirming merger discussions were underway, Woodside and Santos are walking away with no agreement. The no-moat Australian oil and gas producers have provided little color, save for Woodside reiterating it only pursues transactions when value-accretive for shareholders. Excellent news.

Santos is the second-largest Australian pure oil and gas exploration and production company (behind Woodside Petroleum, ASX:WPL), with interests in all Australian hydrocarbon provinces, Indonesia, and Papua New Guinea. Well-timed East Australian coal seam gas purchases and subsequent partial sell-downs bolstered the balance sheet and set the scene for liquid natural gas, or LNG, exports. Santos is now one of Australia's largest coal seam gas producers and continues to prove additional reserves. It is the country's largest domestic gas supplier.

Our AUD 12.30 fair value estimate for no-moat Santos stands. We see limited longer-term valuation implications in Australia’s second-largest oil and gas producer reporting slightly lower-than-expected fourth-quarter 2023 production, offset by higher-than-anticipated average pricing. Our 2023 EPS forecast rises marginally to AUD 0.68, and our DPS forecast is unchanged at AUD 0.26. The dividend equates to a moderate and only part-franked 3.4% yield at the current share price, Santos preferring to supplement a comparatively low about 40% payout ratio with share buybacks. This makes perfect sense while the shares remain at such a steep discount to our fair value estimate. The share count has fallen by about 4% since the first quarter of 2022.

Woodside and Santos have confirmed that they are in early-stage discussions on a potential merger. We think a merger overall has considerable merit. However, no further details are provided by the no-moat businesses and there is no certainty a deal will proceed. A merger would be unlikely to change our view on the moat rating.

Our AUD 12.30 fair value estimate for no-moat Santos stands. We see no longer-term implication in Australia’s second-largest oil and gas producer reporting better-than-expected average third-quarter oil and gas price achievement, only partially offset by marginally lower-than-anticipated production.

Santos is the second-largest Australian pure oil and gas exploration and production company (behind Woodside Petroleum, ASX:WPL), with interests in all Australian hydrocarbon provinces, Indonesia, and Papua New Guinea. Well-timed East Australian coal seam gas purchases and subsequent partial sell-downs bolstered the balance sheet and set the scene for liquid natural gas, or LNG, exports. Santos is now one of Australia's largest coal seam gas producers and continues to prove additional reserves. It is the country's largest domestic gas supplier.

We increase our fair value estimate for no-moat Santos by 4% to AUD 11.30. Australia’s second-largest oil and gas producer reported a sizzling 300% increase in underlying first-half 2022 NPAT to USD 1.27 billion, well ahead of our USD 836 million forecast. EBITDA margin excluding third-party product sales improved to 80% from 74%, somewhat ahead of our 78% expectation. But the margin on third-party sales was well ahead of our expectation and the most significant driver of our profit underestimation. Margin on third-party sales improved to around 50% from historical levels nearer 30%. We expect this is a quirk of current gas market ructions, and we maintain our 40% third-party margin assumption longer term.

We make no change to our AUD 10.30 fair value estimate. Santos reported a 61% decline in 2020 underlying NPAT to USD 287 million, or AUD 0.20 per share, considerably below our USD 436 million expectation. The key difference was higher-than-expected operating costs, considerably related to the ConocoPhillips acquisition, and much non-cash.

We make no change to our AUD 10.30 fair value estimate for no-moat Santos. The company reported a modest 1.0% increase in fourth-quarter production to 25.4 million barrels of oil equivalent, or mmboe, close to expectations. We increase our 2020 EPS forecast to AUD 0.30 from AUD 0.28 due to a strengthening in hydrocarbon prices that occurred toward the back end of the final quarter. Brent crude increased to over USD 50 per barrel by year’s end, from nearer USD 40 halfway through fourth quarter. And in a surprise move the Saudis appear determined to lock in the gains, with a unilateral cut to their production of 1.0 million barrels per day starting in February 2021. Brent crude has averaged closer to USD 55 since that announcement on Jan. 5, 2021.

Santos is the second-largest Australian pure oil and gas exploration and production company (behind Woodside Petroleum, ASX:WPL), with interests in all Australian hydrocarbon provinces, Indonesia, and Papua New Guinea. Well-timed East Australian coal seam gas purchases and subsequent partial sell-downs bolstered the balance sheet and set the scene for liquid natural gas, or LNG, exports. Santos is now one of Australia's largest coal seam gas producers and continues to prove additional reserves. It is the country's largest domestic gas supplier.

Santos is the second-largest Australian pure oil and gas exploration and production company (behind Woodside Petroleum, ASX:WPL), with interests in all Australian hydrocarbon provinces, Indonesia, and Papua New Guinea. Reliance on declining Cooper Basin assets and years of exploration inactivity saw Santos come under production pressure late in the past decade. Stronger energy prices supported earnings, while high-risk exploration under past management disappointed. Well-timed East Australian coal seam gas purchases and subsequent partial sell-downs bolstered the balance sheet and set the scene for liquid natural gas, or LNG, exports. Santos is now one of Australia's largest coal seam gas producers and continues to prove additional reserves. It is the country's largest domestic gas supplier.

We make no change to our AUD 10.30 fair value estimate. Santos has not unexpectedly cut 2020 expenditure guidance, including exploration, by USD 550 million or 38% to USD 900 million. And it has further cut the 2020 cash production cost estimate by USD 50 million. It says the target free cash flow break-even Brent price for 2020 is now USD 25 per barrel. While sharply reduced, this is still higher than the USD 20.50 per barrel we estimated in our oil and gas company note of March 10. However, our estimate assumed a survival setting with no growth capital expenditure.