Santos: Heavy cash flow generator

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
20 January 2023, 12:00 PM
Sectors Covered:
Mining, Energy

  • Santos (ASX:STO) delivered a steady operational result, while reporting a bumper cash flow performance, with CY22 FCF of US$3.6bn
  • Gearing is down to a comfortable 18.7%.
  • STO is positioned to flex its cash dividends and buybacks.
  • Group production and revenue for CY22 came in close to consensus expectations.
  • We maintain an ADD rating with a revised (login to view) target price.

4Q22 close to market expectations

STO reported 4Q22 group production of 25.6mmboe (vs Visible Alpha consensus 25.4mmboe vs Morgans 26.1mmboe), down slightly qoq on lower WA gas volumes following an unplanned outage at the John Brookes platform. This delivered CY22 production of 103mmboe (within 103-106mmboe guidance), towards the lower end on the lost WA volume.

Sales revenue for CY22 of US$7.79bn +65% yoy was in line with expectations (vs consensus US$7.76bn vs Morgans US$7.77bn).

STO reduced CY22 capex guidance for base capex (now expected ~US$1,000m vs previous ~US$1,100m), and major capex (now ~US$1,100m vs previous ~US$1,150-$1,250m), with the changes driven mainly by timing of the spend. 

Gearing is now down to 18.7%, clearing the way for shareholder returns to be the focus with STO’s growth projects already well funded. 

With group production at the lower end of the range, STO now expects upstream unit costs to be slightly higher in CY22 at US$7.90-$8.30/boe (vs US$7.70- $7.90/boe previous estimate). This is not a material change to 2H22 earnings.

The John Brooke platform is expected to remain offline until late-Jan/early-Feb, leading STO to trim CY23 guidance to 89-91mmboe (from 91-98mmboe).

Moomba CCS construction is now 40% complete and on schedule and budget. The large CCS project will deliver a big boost to STO’s ESG profile if it can execute.

No new updates on Barossa, with STO uncertain on budget/schedule changes as it works back through the additional permitting requirements.


The real highlight remains the large FCF generation STO continues to post, reporting another ~US$930m of FCF in 4Q22 and ~US$3.6bn for the year. 

In share price terms, we believe STO lagged larger peer WDS during 2022 due to a combination of mostly external factors (permitting issues for STO and growing Australia political risk vs WDS’ profile with global funds receiving a boost from its post BHP-P merger).

We expect some of those factors to moderate in 2023.

Forecast and valuation update

We have updated our forecasts post the 4Q22 result and guidance changes, with lower net debt a positive versus the cuts to CY23. Post the changes our valuation has been revised to (login to view).

Investment view

Trading at an attractive discount to our (login to view) valuation-based target price, we maintain our ADD rating.

Viewing some of the factors leading to STO underperforming in share price terms as likely to fade in 2023 as the company continues to generate large FCF, oil and gas prices remain healthy, shareholder returns continue to grow (dividends/buybacks), STO finalises its PNG LNG selldown and progresses growth projects at Barossa, Alaska and PNG.

Price catalysts

  • Full-year earnings and dividend result. 
  • PNG LNG selldown completion. 
  • Pikka / Moomba CCS development progress.


Oil & gas price risk (demand drivers). Execution risk on growth projects. Political risk in Australia and PNG.

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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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