Santos Limited (STO)
BUY

Nearly there

 17 Aug 2022
Sector: Energy

Need to know:

  • 1H22 free cashflow US$1.7 billion, up 199%
  • Interim div increased to US7.6cps (unfranked)
  • On-market share buyback increased from US$250m to US$350m
  • FID taken on Pikka Phase 1 Unit in Alaska
  • Advanced discussions on sale of 5% of PNG LNG

Investment implications

It is not quite the portfolio outcome the market has been waiting for, but the imminent sale of a PNG LNG stake is a key catalyst for the stock. The news of a 5% stake sale (almost), with STO intending to keep the remaining 37.5%, is a very positive step. The sell down will release a substantial amount of cash that is likely headed back to shareholders.

PNG LNG is worth approximately US$280-285 million per 1% of equity (excl project finance) on a consensus view. By implication, STO’s total 42.5% stake in PNG LNG equates to about A$5.45 per share. The balance therefore suggests investors are paying just A$1.73 per share, or an EV/2P of US$7/bbl, an absurdly inadequate amount, in our view.

Assuming STO can complete the 5% sale of PNG LNG by year end, gearing would be under 15%.

Free cashflow of US$1.7 billion in 1H22 is yet another record, thanks to the average realised LNG and oil prices achieved in the period.

The decision to proceed with the Pikka Phase 1 unit in Alaska before STO has sold down its 51% stake is disappointing. Even if breakeven on the project is around US$40/bbl while the oil price is closer to US$90/bbl, the lack of news on the sale process is frustrating.

The increased interim dividend and enlarged share buyback are indicative of the potential for further capital management.

The interim result delivered net profit of US$1,267 million ahead of consensus at US$1,131 million.

STO can potentially return a minimum of 100% of its market capitalisation over the next 8 years, assuming an oil price of US$65/bbl, or 150% at US$100/bbl.

This commentary reflects our initial view. For detailed reports for companies under Sandstone Insights coverage, see our latest research notes for our investment view and specific risks associated with investing in these companies.

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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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