Santos: Impressive FCF in tough half

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
18 February 2021, 10:00 AM
Sectors Covered:
Mining, Energy

  • An in-line second half result for Santos (ASX:STO), with 2020 underlying NPAT of US$287m (vs consensus US$289m vs MorgE US$351m).
  • Santos generated free cash flow of US$740m, for a FCF yield of 8%.
  • Core focus in the result unsurprisingly was the FX-impacted cost guidance for 2021, in-line with pressure being felt across the resources industry.
  • Progress at Barossa leaves it on track for 1H21 FID, with Santos closing in on leasing an FPSO.
  • We maintain our Add rating on Santos, with a revised target price from A$8.20 (login to view).

In-line 2020 result

Santos delivered a 2020 result in-line with expectations, with underlying NPAT of US$287m (vs consensus US$289m) ahead of our estimate of U$351m due to a combination of other expenses and D&A. Underlying EBITDAX of US$1,898m (-18% pcp) was closer to our forecast of US$1,918m, and 5% ahead of consensus.

In capital conservation mode for the majority of 2020, made easier by Santos’ control over all of its core assets (ex-PNG), Santos generated Free CF of US$740m (vs consensus US$689m vs MorgE US$753m). This leaves Santos on a 2020 FCF yield of 8%. Santos declared a final dividend of 2.9 cents.

Guidance for 2021

Santos managed to offset cost pressure in 2020, with production costs of US$8.04/boe (vs guidance US$8.00-$8.50/boe) against full year group production of 89mmboe.

2021 guidance meanwhile is for flat to higher production costs, with guidance of US$8.00- $8.50/boe retained and production range of 84-91mmboe (including assumed sell-down of a 25% stake in Bayu Undan to SK E&S during 1H21) that is lower at the mid-point.

While volumes will be flat to down, and costs flat to up, in 2021, it could still be a good year for Santos on advancing key projects and continuing oil and gas price recovery.

Growth projects in motion

Santos is guiding that it will be in a position to achieve a final investment decision (FID) at Barossa (brownfield gas backfill for Darwin LNG) during 1H21, as well as a decision on entering FEED at Dorado (greenfield oil project).

The timing at Barossa appears more critical, with Santos outlining a 1H21 FID would put it on track to stay ahead of cost pressures reemerging. The critical hurdle to keeping Barossa on schedule remains securing the FPSO (base case assumption remains a leased FPSO with a pre-payment and option to buy).

Santos is targeting cash costs at Barossa of ~$2.00/mmbtu (including FPSO lease).

Maintain Add rating, top large-cap exposure

We have increased our production cost assumptions for 2021 in-line with Santos guidance for costs to remain under pressure from the high Australian dollar and the year in transition as activities pick up around its growth projects.

Post the changes and roll forward of our model our target price has been revised (login to view). We maintain our Add rating.

While Santos’ share price is similarly correlated to oil prices, relative to its upstream peers, it enjoys the smallest oil exposure with around a third of sales from fixed price gas contracts, giving some downside protection to earnings. The key risk to our call is energy demand related.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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