Wallflower

FY22 RESULT

Need To Know

• FY22 free cash flow US$3,641m +101%
• Final div US15.1cps unfranked (market US13.4cps), plus US$700m buyback, total returns US$1,455m
• Earnings miss on EBITDAX by 4% on higher costs, royalties

The key elements of Santos’ full year were already known, but the minutiae might disappoint those with a short attention span. The Board has decided to stretch out the capital management returns of which there is an embarrassment of riches.

Result. Higher oil prices played a big role in STO reporting a record amount of free cash flow at US$3.6bn enabling a higher final dividend (US15.1cps) alongside the existing US$700m share buyback (US$384m completed). A non-cash provision of US$211m for future restoration provisions on non-producing assets was the main factor that disturbed the otherwise in-line net profit of US$2,461m.

Gearing has been reduced to 18.9% (net debt US$3,490m Dec 22) amidst a target range of 15-25%. This will quickly fall in 2023 as operating cash flow keeps filling the bucket leaving the Board with further capital management decisions to make this year.

Operational discipline has been a key feature in recent years. Unit operating costs are trending down (US$7.82/boe FY22) and targeted to US$7.25-7.75/boe in FY23f. Core portfolio breakeven is at ~US$35/bbl through the cycle.

In addition to sustaining capex of US$1.2bn, major project capex of approximately US$1.8bn is expected for FY23f. This begins to trail off through to FY26f as each project is completed.

Investment View

A very interesting snippet popped up today concerning Carnarvon Energy’s (CVN) sale of its 10% stake in the Bedout Basin assets to Korea’s CPC for US$146m. This includes Dorado and Pavo in which STO is the main stakeholder and operator. CVN was a forced seller, but even at this amount, the implied value of Dorado is stridently above what the market is thinking. 

By extension, the share price is failing to recognise any value for Dorado, Barossa, Papua or even some of the producing assets.

The result itself does not add much to the conversation on STO. The real question for shareholders is one of value recognition in the share price. For a stock with excess capital, a broad range of excellent projects, substantial reserves and top tier management, the share price is offering entry to a covers band at the local pub rather than Taylor Swift at the Opera House. 

Figure 1: Free cash flow

Figure 2: FY22 Result

Specific Disclosure: Sandstone Insights analyst holds a position in the subject company.