Ord Minnett Research Insight: Santos
As expected, Santos announced its decision to proceed with its US$3.6bn development of the Barossa-Caldita gas field. Santos’s equity share of proven and probable (2P) reserves from this project is estimated at 380m barrels of oil equivalent. A further US$600m capital expenditure outlay is expected to extend the project life of Darwin LNG by 20 years, as well as to undertake work to connect existing pipeline infrastructure to the new gas field.
The infill drill program at Bayu-Undan should see gas into the Darwin LNG plant through to CY23. There will then be a necessary hiatus in production ahead of Barossa in order to complete the Darwin LNG life extension project. We have modelled a decrease in supply of feedgas from the Bayu-Undan field, resulting in declining production from Darwin LNG through CY21 to CY22, before it reaches zero production in CY24. We forecast Barossa will produce first gas by the first half of CY25, which should drive production at Darwin LNG back to full capacity of 3.7Mtpa.
Successfully achieving final investment decision on Barossa was a necessary condition for Santos to proceed with its equity sell-down agenda. The company expects to close its 25% equity sell-down to S&K ES in the Darwin LNG and Bayu-Undan project by the end of April 2021, deriving net proceeds of US$200m. Santos is also planning to sell a 12.5% stake in the Barossa development to Japanese firm JERA. Negotiations are ongoing with a decision likely in the second half of CY21.
Driven by uncertainty due to the COVID-19 pandemic and the resulting demand shock on oil prices, CY20 saw a pullback in capital expenditure and new project announcements – only one new LNG project was announced last year. In our view, the decision to proceed with the Barossa project reflects a broader uptick in investment decisions during CY21, both in Australia and globally. We also expect it to be one of the lowest-cost LNG projects in Australia and within the middle band when compared to global peers.
Santos remains our preference among the large-cap exploration and production companies and we maintain our Accumulate recommendation with a $7.95 target price.
Walter is the Editor of Ord Minnett's retail investor publications, such as the Opening Bell, Ords Weekly and the Ords Monthly, along with various investment guides and investor information published by Ord Minnett.