Santos: Positioned to catch up

Author name:: By Adrian Prendergast
Job title:: Senior Analyst
Date posted:: 21 October 2022, 8:00 AM
Sectors Covered:: Mining, Energy

Strong 3Q22 result with higher revenues and volumes qoq, although slightly missing consensus.
Degearing rapidly, unlocking meaningful synergies from the OSH merger, quality earnings, and one of the few large-cap resource stocks with meaningful growth.
Maintain an Add rating with further upside available at a (login to view) target price.

3Q22 Result

Group sales revenue of US$2,150m (+15% qoq) was below consensus of US$2,329m, with group sales volumes of 29.9mmboe (+9% qoq) beating consensus of 28.8mmboe. Group production of 26.1mmboe was in line with consensus of 26.0mmboe.

PNG and Darwin LNG production both came in above consensus, with PNG production of 10.6mmboe (vs consensus of 10.1mmboe) and DLNG production of 1.2mmboe (vs consensus of 0.9mmboe).

Product wise, LNG and domestic gas revenues grew qoq at US$1,313m (+22% qoq) and US$387m (+40% qoq) respectively, riding the increased sales volumes during the period.

The higher revenues supported healthy cash flow generation in the quarter with STO reporting FCF of US$1bn in 3Q22, which helped to reduce gearing to 20.8%.

FY22 production guidance was narrowed to 103-106mmboe (from 102- 107mmboe), as was sales volumes guidance to 110-114mmboe (from 110- 116mmboe). Major projects capex guidance meanwhile was lowered to US$1,150- 1,250m (from US$1,400-1,500m).

In line with our pre-merger expectations, STO continues to unlock healthy synergies from its merger with OSH, so far achieving savings of US$112m during the 9 months since the merger completed.

Analysis

A steady quarter with few surprises. Having worked through a number of risks, STO still needs to secure approval on its drilling and completion activities environmental plan.

Approval from the regulator had already been received, and work on developing Barossa was 46% complete, until a Federal Court decision to set aside that approval. STO is now appealing that decision, with a hearing set for mid-November, so work can get back underway promptly.

The post-merger STO is starting to really stretch its legs in terms of quality of earnings and cash flow. We expect gearing to continue trending lower, which will increase STO’s investment appeal.

While we have seen oil prices hit ‘pause’ on their upcycle over the last quarter, as the world digests slowing growth and a surging US dollar, we expect oil and gas price conditions to remain supportive with the upcycle intact.

STO is positioned to benefit against this setting, having de-rated in recent months while the market worried over the threat of potential government intervention into east coast gas markets. With this risk now cleared, we expect STO will only need to work through recent legal issues at Barossa to start to trade towards our valuation.

Forecast and valuation update

We have updated our production and revenue estimates for the 3Q22 result, updated production/sales guidance and rolled our model forward. We have also trimmed CY22 capex estimates in line with the reduction in major capex guidance.

Investment view

Still trading at a sizeable discount to our (login to view) target price we maintain our Add recommendation.

Price catalysts

Approval to resume work on Barossa (court hearing mid-November).
Development of Pikka Unit in Alaska (drilling to commence 2Q23).

Risks

Global-macro and US dollar demand drivers.
Execution and permitting on Barossa.

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