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2Q23 PRODUCTION

Need To Know

• Similar theme to WDS with easing commodity prices and lower revenue, but free cash flow of US$1.1bn in 1H23.
• STO begins planning to construct Narrabri Gas Project, pending August Federal Court decision.
• Buyback completed. Balance sheet has capacity for more. Will the result on 23 August deliver?

Investment Implications

Softening commodity prices and lower revenue but solid free cash flow encapsulates Santos’ second quarter. The company is patiently waiting on several key decisions to unleash various projects.

The US$700m buyback is now complete (approx. 139m shares or 4.1% of total issued) purchased at an average $7.47 per share. The balance sheet certainly has capacity for more capital management as net debt sits at US$4.1bn and gearing at 21.9% as at 30 June 2023. The first half result is due on 23 August which is just ahead of the extended deadline (31 August) for the PNG Government to accept the terms of the 5% purchase of PNG LNG (US$1.4bn).

Narrabri Gas Project. In December 2022, the project received approval from the National Native Title Tribunal, but this was subsequently appealed requiring a Federal Court decision, now due in August. As an indication of STO’s confidence, the company has begun planning for construction activity along with land access agreements (most of the project is on State Forrest land). If the project finally gets underway and unlocks up to 150 TJ/day dedicated to the domestic gas market, there would be implications for the NSW and Australian energy market. NGP could supply up to half of NSW’s gas demand. STO also recently acquired the Hunter Gas Pipeline which runs adjacent to the NGP.

Barossa. The Barossa gas and condensate project to backfill the Darwin LNG plant is 60% complete but drilling remains suspended due to a Federal Court decision. STO noted that ‘assuming regulatory approval for the Environmental Plan is obtained’, there is potential for drilling activities to ‘recommence before the end of the year’. This could allow the project to get back on track to commence production in 1H25 and within current cost guidance.

2Q23 result. STO has narrowed FY23 production guidance to 89-93 mmboe (was 89-96 mmboe) and lowered capex to US$1.5-1.6bn (from US$1.8bn) due to phasing of spend. Average realised prices were lower as the benchmark global prices in oil and LNG have fallen due to slowing global economic growth. Second quarter LNG price for STO at US$11.96/MMbtu was -17% compared to 1Q23 while domestic gas prices eased 7%. Revenue declined to US$1,336m in 2Q23 as a consequence given the small -2.1% sales volume decline to 23.3mmboe.

Investment View

STO remains in a strong position though frustrated by the various Court proceedings hampering development of some projects. Some confidence appears to be creeping back into the commentary, however, and with a little more patience, shareholders could again be awash in capital management initiatives. We extend our patience in tandem and retain our Buy recommendation.

Figure 1: Average realised prices

Figure 2: Product revenue