Santos: Rolling towards merger

About the author:

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

  • A solid operational performance from Santos Limited (ASX:STO) against a backdrop of rising prices for energy resources.
  • ayu-Undan life extension drilling paying dividends with first well coming online.
  • GLNG upstream performance impresses on good output.
  • 2021 sales guidance maintained while production and cost guidance upgraded.
  • Free cash flow of US$359m +33% with gearing still steadily declining.
  • OSH merger on track for completion before year end, OSH shareholder vote still key hurdle.
  • We maintain our Add rating with STO a top sector preference.


3Q21 group production of 21.9mmboe (vs MorgE 22.1mmboe) was roughly inline. Sales revenue of US$1,142m was 5% ahead on better-than-expected prices.

In terms of 2021 guidance, STO maintained sales guidance (100-105mmboe) while narrowing production guidance to the high end at 88-91mmboe (was 87- 91mmboe).

Solid performance across STO’s operations, in particular:

  1. GLNG 20% rebound in LNG production following 1-month turnaround previous quarter while upstream was down slightly
  2. PNG LNG production which increased 6% to an annualised rate of 8.5mtpa also rebounding from maintenance the previous quarter, and
  3. Darwin LNG with gross production +5% (although net number lower post sell-down of 25% interest to SK E&S), with surprisingly strong production from the first life extension well from Phase 3c infill drilling coming online during the quarter.

2021 upstream production cost guidance was cut to US$7.70-$8.00/boe (was US$7.90-$8.30/boe). Base capex was narrowed to the high end at ~US$900m (was US$800-$900m).

While major capex guidance was lowered to ~US$500- $600m (was ~US$700m), on timing of Barossa spend and the delay at Narrabri with the approval from the NSW Independent Planning Commission under appeal.

Barossa development is progressing, now 15% complete and on schedule/budget.

STO reaffirmed that it still expects the timing of the OSH merger is unchanged and on track for completion by year end. The key hurdle being an OSH shareholder vote, in addition to approvals such as from the PNG government.


We see a lot of opportunities for STO to create meaningful value from the OSH portfolio, from:

  1. synergies/efficiencies (OSH is an overheads-heavy business despite only operating a small number of assets),
  2. there is an opportunity for STO to sell-down its increased PNG LNG equity to bring Total into the base project (aligning interests across PNG LNG and Papua LNG), and
  3. potentially monetizing OSH’s Alaskan oil interests.

A solid operating result from STO, close to our estimates.

Forecast and valuation update

We have only made minor adjustments to incorporate 3Q21 and new guidance.

Investment view

Not currently part of our base case, but we are excited to see what value STO can unlock from the proposed merger with OSH. We view this as the largest driver of upside risk outside of our base case.

We maintain our Add rating with an upgraded target price of (login to view).

Price catalysts

OSH shareholder vote and merger completion.

Potential deals on project interests.


COVID-related risk to demand drivers for energy resources.

OSH merger not being finalised.

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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.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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