Santos has just made a significant oil discovery in offshore Western Australia, with the (high) prospect of substantially more to come, but the share price barely moved on the announcement. What is the market waiting for?
A mere 46km east of the Dorado field in the offshore WA Bedout Basin, the Pavo-1 exploration well turned out to be a cracker result for STO (70%) and its junior partner Carnarvon Energy (CVN 30%). The drill results yielded some highly attractive metrics indicating a gross resource of 43 million barrels of light sweet (~52 degrees API) crude oil (STO 70%).
The result significantly de-risks the hydrocarbon bearing potential of the northern area of the field. The southern area is now estimated to contain some 40mmbbls gross (50% probability) with a 60% probability of geologic success assigned.
Not only is the potential size of the discovery a material addition to reserves, but the economics of the field are extremely attractive. Given its adjacency to the planned Dorado FPSO, CEO Kevin Gallagher said Pavo-1 could support a low-cost tie-back to the first phase of the Dorado development, which itself is nearing its final investment decision by mid year. The Pavo north area is estimated to have a breakeven cost of less than US$10/bbl – among the best economics in the world.
But wait, there’s more.
The drilling rig has now moved 20km south-west of Pavo (31km from Dorado) to the Apus-1 exploration well which presents yet another low cost tie-in opportunity. The prospective gross resource here is about 160mmbbls (50% probability). Dorado itself has a 2C resource of 162mmbbls (gross) and is targeting initial daily production of 75-100k bopd.
Investment view
The lack of reaction in STO’s share price to what is unequivocally positive news defies logic. We can only surmise the market is waiting for STO to deliver a major portfolio realignment following the Oil Search merger in December last year. This would include a sale of the Alaskan assets and a potential sell down of PNG LNG. Irrespective of this assumption, STO is generating increasing amounts of free cash flow, with capital management options available to the Board.
With oil prices frolicking north of US$100/bbl, substantial synergies coming from the OSH merger (targeting US$90-115m pa at full integration) and multiple growth developments underway, the share price is looking more and more like a sprung coil.
Risks to investment view
Oil prices remain subject to volatility and operational risks are always present for oil and gas companies. If STO cannot execute on its strategy to optimise the merged portfolio and develop its major growth projects, then earnings and value could be lost.
Recommendation
We have retained our Buy recommendation.
