Ord Minnett Research Recommendation:
Santos Ltd (ASX: STO)
Santos released a weaker than expected production report, with output of 25.5 million barrels of oil equivalent (mmboe) and sales volumes of 27.6mmboe. Lower production was due to major planned maintenance at PNG LNG, Darwin LNG and the Cooper Basin. Lower sales volumes more than offset higher than expected commodity prices to result in reported revenue of US$1.9bn, 6% weaker than forecast. The company reported first-half free cash flow generation of US$1.7bn, representing an annualised yield of 19%.
Despite natural field decline at Bayu Undan and interrupted production at Darwin LNG and PNG LNG, Santos shipped 58 LNG cargoes, of which nine were spot cargoes. This implies LNG spot exposure of around 15%, broadly in line with the previous period. Santos achieved US$14.66 per million British thermal units for LNG and US$5.08 a gigajoule for domestic gas, both within range of our estimates. The realised oil price at US$119.55 a barrel was 7% above our forecast. However, the higher than expected commodity prices were more than offset by the lower sales volumes.
Management updated full-year production guidance to 102–107mmboe, versus our 106mmboe estimate. This implies production will need to average 25–28mmboe for the remaining quarters to meet guidance. We have also increased our unit cost and depreciation, depletion and amortisation assumptions, along with modest increases to our capital expenditure estimates based on management’s updated guidance. This has resulted in our net profit estimates falling by 6% in CY22, and 3% in CY23 and CY24. We also note current consensus earnings estimates look high and we see potential for downgrades following this result.
We see the balance sheet as being in a reasonable position to fund capital expenditure. Proceeds from asset rationalisation and scope for further the sell-down of infrastructure assets could deleverage the balance sheet further and provide opportunities for capital management.
Our underlying investment thesis remains unchanged: we like the company’s growth optionality, strong balance sheet and exposure to east coast gas. With the stock trading on a 0.76x price to net present value multiple, Santos is now the cheapest large-cap oil and gas stock under our coverage and we maintain our Buy recommendation with a $9.55 target price.
Walter Watson
RESEARCH EDITOR
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.