A strong base business together with rising commodity pries is churning out record amounts of free cash flow for Santos and this looks set to persist into the next quarter. STO is on track to complete its merger with Oil Search this year leading to the creation of a top 20 company in Australia.
The average realised LNG price received by STO in 3Q21 was US$10.36/MMbtu (WPL US$9.70) and the company sold 12 LNG cargoes at spot JKM prices.
Production of 21.9mmboe for the quarter was lower than 2Q21 due the sell down of a stake in the Bayu-Undan project and a lower entitlement under the project sharing contract due to the higher commodity prices.
STO nudged up the lower end of its FY21 productsion guidance range so the new guidance for the year is 88-91 mmboe on a standalone basis.
Revenue of US$1,142 million in 3Q21 will likely be even higher in 4Q21 as commodity prices edge higher. Encouragingly, STO has modestly improved its cost guidance range to US$7.70-8.00/boe for FY21f. The combination of revenue and cost trends suggests consensus forecasts for FY21 are conservative.
Investment view
The merger with OSH still requires shareholder approval along with approval from the PNG courts. Assuming the merger completes, the combined businesses hold significant appeal, particularly if it can effect a partial sell down at PNG LNG and de-risk the balance sheet. The post-merger agenda is not easy but it does hold promise and shareholders should be highly confident that management can deliver on that.
STO is an exceptionally well run business with a compelling strategy and is at the beginning of a highly profitable cycle. We retain our Buy recommendation on STO.
