Santos: Confident in its share price

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
21 April 2022, 9:00 AM
Sectors Covered:
Mining, Energy

  • Enjoying strong FCF, STO has announced a new capital management framework.
  • The framework includes a new dividend policy, linking future dividends to a share of FCF and giving it flexibility to boost returns when oil prices rise above US$65/bbl.
  • Santos (ASX:STO) also announced a share buyback of up to US$250m starting in May 2022. Essentially flagging it is confident that its share price is still cheap.
  • Target gearing of 15-25% (currently 26%).
  • While we maintain an Add rating at the current share price, we see an on-market share buyback at a multi-year share price as an unnecessary value risk.
  • Growing earnings should ease any lingering market concerns around STO’s balance sheet.

New capital management framework

Buoyed by increased FCF generation, STO has moved to a new capital management framework that will allow it to boost returns during periods of elevated oil prices. 

The new framework includes:

  1. Dividend payout of 10-30% of FCF (ex-major growth capex) up to an average Brent price of US$65/bbl,
  2. Additional return of at least 40% of incremental FCF at oil prices above US$65/bbl in the form of additional dividends and/or buybacks, and
  3. Target gearing range of 15-25% (against current gearing of 26% at the end of March).

With the above in mind STO also announced an on-market share buyback of up to US$250m, to start in May 2022 and run over the remainder of the year.


It is good to see STO prioritising shareholder returns, particularly during periods of elevated earnings. In particular linking returns to FCF strength while leaving plenty of capacity for management to flex distributions.

Although it is harder to see the value proposition of the on-market share buyback at current prices. Other than a brief spike in early 2020 (pre COVID), STO is trading at its highest share price since 2014. This increases risk around the assumption that the buyback adds value.

History has taught us that buybacks typically struggle to add value when conducted at cycle highs.

Forecast and valuation update

We have included the planned US$250m share buyback in our forecasts, and changed our dividend estimates to the new policy.

Post these changes our target price has increased to (login to view).

Investment view

STO share price has performed better over the last month, enjoying leverage to ongoing strong oil/gas prices.

We attribute this to growing market confidence in STO’s ability to manage its balance sheet and growth.

We maintain an Add rating and (login to view) target price.

Price catalysts

Rising earnings have left asset sales as a smaller priority, but we still expect STO to sell-down equity in PNG and Dorado.


  • Execution risk on growth.
  • COVID risk to STO operations and energy demand.

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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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