Santos: Firing on all cylinders

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
18 August 2021, 9:00 AM
Sectors Covered:
Mining, Energy

  • A good 1H21 result for Santos Limited (ASX:STO), with EBITDAX 3% ahead of our estimate and +24% yoy.
  • The further detail provided on the STO/OSH merger highlights the potential for material value to be unlocked consistent with our initial expectations.
  • STO has flagged an interest in utilising its high resulting equity in PNG LNG to better align the PNG LNG and Papua LNG JVs.
  • Moomba CCS is making tangible progress, with Australian Carbon Credit Unit eligibility expected to be received in 4Q21.
  • The strong STO result and complementary merged growth strategy both support our conviction. We maintain our Add rating with a (login to view) target price.

1H21 result ahead

With revenue reported at its 2Q21 result, 1H21 EBITDAX outpaced our estimate by 3% (US$1,231m actual vs US$1,192m MorgansF). Solid yoy growth of 24%, on the continued recovery in oil and gas prices.

This saw EBITDAX margin reach a 2-year high, topping 60% in 1H21.

The small beat on our numbers came from a better-than-expected cost performance. With group opex -10% yoy and -5% vs MorgansF. We attribute this to impressive costs achieved at Darwin LNG and a smaller-than-expected increase in Cooper Basin costs (with lower partner participation has seen decreased volumes). Being conservative we expect some increase in NT costs in FY22, while STO will slow the production decline in the Cooper by deploying an extra rig (oil).

1H21 D&A was below our estimate at US$602m (vs US$623m MorgansF), which contributed to underlying NPAT of US$317m (vs US$286m MorgansF), 11% ahead of our estimate.

STO announced an interim dividend of USD 5.5cps (vs 3.0cps MorgansF), which was at the midpoint of STO’s dividend policy to payout 10-30% of FCF. We had thought STO might hold back its interim dividend ahead of a 2H21 increase in capex as activity at Barossa picks up following its recent FID.

Outlook commentary

In the 1H21 result STO maintained focus on its healthy FCF generation and resilience. With this clearly still the key strategic priority for management.

Moomba CCS appears to be making progress towards development. With the FIDready carbon storage project only requiring Australian Carbon Credit Unit eligibility, which STO expects in 4Q21. Procurement and engineering of the 1.7mtpa CCS project is unlikely to stretch on given CCS are straightforward technically.

Key focus in the result and briefing remained on the altered asset equity sell down scenarios facing STO post-merger with OSH. In particular, STO flagged potential to utilise a merged 42.5% interest in PNG LNG to better align the PNG JV’s. While no indications yet from STO management on its specific plans for OSH’s Alaskan oil interests.

Forecast and valuation update

We have made minor adjustments to our FY21/22 forecasts post the 1H21 result that has seen a small decrease in our target price to (login to view).

Investment view

STO remains our top preference amongst our large-cap energy universe. With early indications supportive of our view that material synergies and enhanced growth plans will result from the OSH merger.

While in good shape, we expect STO to continue gaining investor support as it executes on the opportunistic OSH merger. We maintain our ADD rating.

Price catalysts

OSH merger. 

Moomba CCS FID.


Risks around STO/OSH merger. Execution risk on growth projects. Oil and gas prices.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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