Santos: Still producing healthy FCF

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
23 July 2021, 12:00 PM
Sectors Covered:
Mining, Energy

  • A consistent 2Q21 result with group production and sales revenue close to our forecasts overall.
  • Free Cash Flow (FCF) in the first half of US$572m reflects good capital discipline.
  • Maintain ADD rating with revised target price (login to view).


Santos Limited (ASX:STO) released its 2Q21 result, a good result that was close to our expectations.

Strong FCF generation continued in 2Q21, at US$270m. Trailing our estimate of US$311m but keeping STO on track to produce +US$1.1bn of FCF in 2021.

2Q21 group production of 22.5mmboe (vs MorgE 22.6mmboe), was -9% qoq due to the April completion of the Bayu Undan / DLNG 25% selldown.

Sales revenue in 2Q21 of US$1,076m was overall close to our estimate of US$1,094m, +12% qoq.

Group capex of US$334m came in above our estimate of US$298m for 2Q21, with the difference coming mostly from STO’s WA business.

Good 2Q21 production from Darwin LNG (+3% vs MorgE). Importantly STO outlined that the first of its 3-well infill drill program at Bayu Undan had been successful, with testing ongoing and the well planned to be brought on as a producer. We expect this will help narrow the gap between Bayu Undan depletion (mid-2022) and Barossa startup (2025).

GLNG upstream was steady. Equity gas production remained at healthy levels 49PJ (vs MorgE 51PJ) despite capex remaining at US$41m (-20% yoy).

PNG LNG 2Q21 production was lower during 2Q21 on planned maintenance, with LNG output (STO share) of 265kt (vs MorgE 267kt).

WA gas volumes of 43.4PJ (vs MorgE 44.2PJ) were +2% qoq on seasonally higher demand. While 2Q21 condensate production of 310mbbl (vs MorgE 313mbbl) was -3% qoq. Increased liquids lifting delivered 1.2mmbbl of oil output that was not in our numbers.

Dorado (greenfield oil project) is progressing through FEED (front end engineering and design) with STO expecting to sign major FEED contracts for the FPSO and platform during 3Q21. Meanwhile, the data room is open on Dorado with STO seeking a minority equity selldown to reduce its capex requirement.

On the ESG front, after a 12-month wait for the Federal Government to put the necessary framework in place, there are encouraging signs the Moomba CCS project might be moving towards a construction phase. STO is still awaiting project recognition for Australian Carbon Credit Units. While the proposed Bayu Undan CCS project could entirely offset Barossa’s carbon footprint on its own.


Strong FCF generation remains a fundamental strength, and reflective of robust capital discipline. A positive result operationally with inline group sales revenue.

Forecast and valuation update

We have slowed the drilling pace at Cooper Basin and GLNG upstream after reviewing the result, with resulting decreases across capex at each.

2021/22/23 EPS has declined -7.0%/-6.9%/-8.7%. The lower earnings and capex has seen our valuation-based target price revised to (login to view).

Investment view

STO remains our top pick amongst ASX-listed large-cap oil & gas producers. Its key strength being its management, in a sector that ranks poorly for management quality, as well as having the best project/product/geographical diversification.

We maintain our ADD rating, with conviction in STO’s overarching strategy.

Price catalysts

Updates on proposed merger with OSH.

Possible selldown of equity in Dorado or Barossa


Oil/LNG price risk. Execution risk around Dorado and Barossa.

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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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