Ord Minnett Research Recommendation: Santos Ltd (ASX: STO)
Santos posted a March-quarter production report broadly in line with Ord Minnett’s estimates, with strong cash generation being a highlight.
The company posted quarterly production of 26 million barrels of oil equivalent and revenue of US$1.9bn, which were within 3% of our forecast. The company recorded strong LNG and crude oil output, but this was offset by weaker domestic gas production in Western Australia. Management attributed this to an outage at a major customer, resulting in lower volumes.
During the quarter, Santos shipped 60 LNG cargoes, of which 13 were linked to spot prices. This included seven spot cargoes from Papua New Guinea LNG and Darwin LNG, and six contracted cargoes linked to the Japan Korea Market benchmark from Gladstone LNG. Despite a higher proportion of spot-linked cargoes in the March 2022 quarter (22%) compared to the December 2021 quarter (18%), average LNG realised prices were broadly flat at US$13.77 per million British thermal units. Based on the three-month lagged Japanese Crude Cocktail price of US$80 a barrel, this represents a slope of 17.2%.
Santos posted quarterly free cash flow of US$865m on the back of robust commodity prices. On an annualised basis, this implies a free cash flow yield of 17%. With oil prices likely to remain elevated over the near term, we expect cash generation over CY22 to lead to further balance sheet deleveraging and support the company’s ability to sanction and execute its pipeline of growth projects. Furthermore, under the updated capital management framework, we see scope for additional returns to shareholders. This may be further bolstered by cash generated from potential asset sales, which have previously been flagged by management.
Commodity prices are likely to remain elevated in the near term, in our view, and this will further strengthen the company’s balance sheet as it grows, as well as the option of additional capital returns to shareholders.
Incorporating the latest quarterly result into our modelling sees a 1% reduction in our CY22 revenue and net profit forecasts, while our estimates for later years are unchanged. Santos remains our preference among the energy companies we cover and we maintain our Buy recommendation with an unchanged target price of $9.60.
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.