Asset sell down

27 Sep 2022

Sector: Energy

SELLS 5% STAKE IN PNG LNG PROJECT

Need To Know

STO sells 5% of PNG LNG to Kumul for US$1.4bn
Reduces STO interest in PNG LNG to 37.5%
STO FCF heading to ~US$3.375bn in CY22

Investment implications

STO has sold a 5% stake in PNG LNG to existing JV partner, Kumul Petroleum for ~US$1.4 billion, including a proportionate share of project finance debt of US$0.3bn. The implied value of a 1% stake in PNG LNG is ~US$297.5 million, adjusting for remediation and lease liabilities and noting the proposed transaction date of 31 December 2022. This then implies STO’s full 42.5% stake (pre transaction) in PNG LNG is worth A$5.90 per share.

The rest of STO is being significantly undervalued. The residual 1,174mmboe of 2P reserves as at 31 December 2022 outside of PNG LNG is therefore being valued by the current share price at an EV/2P reserves of US$4.63/boe with a reserve life of ~19.5 years. This is before Barossa and Alaska become productive assets around 2026.

STO capital management. STO increased its on-market share buyback to US$350m at the interim result but has yet to say what it will do with the proceeds from the proposed transaction on PNG LNG. Suffice to say, a big increase to the buyback may be imminent. If the oil price remains around US$100/bbl to 2030, a reasonable assumption given the lack of global supply due to underinvestment, STO could potentially return a minimum of 150% of its market capitalisation over the next eight years, or 100% at US$65/bbl.

Figure 1: ~US$16-27bn forecast cash surplus to 2030

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Stock overview

Share Price

Company overview

Santos is an Australian-based oil and gas producer with assets in the Cooper Basin, PNG LNG (42.5%), Papua LNG (22.8%), Bayu-Undan and Darwin LNG projects (43.5%), Barossa (62.5% reducing to 50% on partial sale to JERA), Gladstone LNG (30%) and the Pikka Unit in Alaska (51%).

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