Santos: Size of the prize

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
21 January 2022, 12:00 PM
Sectors Covered:
Mining, Energy

  • A good end to the year for Santos (ASX:STO) with both 4Q21 production and sales revenue beating consensus estimates according to Visible Alpha data.
  • Strong operational performances from WA and DLNG helped carry the result.
  • Sales revenue for 4Q21 came in at US$1,532m (vs consensus US$1,401m).
  • Barossa FID targeted for mid-2022. Pikka (Alaska) FID sometime during 1H22.
  • We see an opportunity for STO to beat market expectations on synergies in its merger with OSH given the level of capital inefficiency we saw at OSH.
  • We maintain our Add rating, with STO still trading at a large discount going into a catalyst-heavy 2022.

Solid 4Q21 operational & sales result

STO posted 4Q21 production of 22.9mmboe (+5% qoq), comfortably beating consensus estimates of 20.8mmboe. Although a mixed performance by asset, with the WA business (+15% vs consensus) and DLNG (+30% vs consensus) putting up impressive performances while PNG (-26% vs consensus) and Cooper Basin (- 10% vs consensus) fell well short of expectations according to Visible Alpha.

4Q21 group sales revenue of US$1,532m was also ahead of consensus at US$1,401m, and +34% qoq. While enjoying upside from rising oil and gas prices, the rate of increase is much slower than peer WPL, with STO less exposed to spot prices given its large fixed-price gas business in WA.

Getting on with growth, STO expects a final investment decision (FID) at its Barossa field by mid-2022, while FID is also expected at Pikka (Alaska) sometime during 1H22.


We still expect STO to pursue an equity selldown at Pikka that includes giving away operatorship, this would materially reduce STO’s footprint in Alaska and management time for a similar result with the project nearing development.

The large consensus miss on PNG could be partly explained by some of the street mistiming the OSH merger, which was only effective from 11 December.

2022 is likely to be a year of bedding down the OSH merger and moving ahead with STO’s growth projects. We expect STO will be able to unlock larger synergies than its guided US$90-$115m pre-tax.

Based on the amount of capital efficiency we estimate sat within OSH’s business (high-cost Sydney office, Port Morseby and Anchorage offices, outsized G&A, and level of discretionary drilling in PNG and Alaska) in addition to the layers of duplication across corporate and PNG.

Forecast and valuation update

We have updated our 2021 forecasts for the 4Q21 result which has also seen some flow-on changes to our 2022 estimates for production and opex.

Applied updated house oil price forecasts to our estimates (summary further).

Investment view

STO remains one of our most preferred energy sector exposures. Given high market confidence we expect STO’s share price to outperform its reduced sensitivity to rising oil and gas prices as it works to de-risk growth and unlock value from its OSH merger. We maintain an Add rating with (login to view) target price.

We see STO as well placed to participate in the upcycle while also holding greater earnings protection through diversification than the rest of its Australian peers.

Price catalyst

The progress of development projects, potential for asset deals, and likely drip-feed of good news on synergies sets up 2022 as a catalyst-heavy year for STO.

2022 guidance to be set at full year result.

Potential PNG LNG selldown to Total. Selldown of equity in Pikka.


COVID related risks to operations and energy demand drivers.

Execution risk on developments projects.

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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.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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