Santos: Balance sheet no concern

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
17 February 2022, 8:30 AM
Sectors Covered:
Mining, Energy

  • We see the supportive oil price environment as capable of comfortably funding 2022 capex, while it will also be able to cut gearing through potential asset sales.
  • Santos (ASX:STO) posted a steady 2H21 result in line with consensus, while setting reasonable FY22 production and sales guidance.
  • We maintain our Add rating on STO which is a key sector preference.

Good result with reasonable guidance

Underlying NPAT of US$946m was dead inline with Visible Alpha consensus and close to our estimate of US$932m, while underlying EBITDAX was -3% below estimates at US$2,805m (vs consensus US$2,905m vs MorgansE US$2,917m). STO surprised with a final dividend of USD 8.5c (vs consensus 6.0c vs MorgansE 7.0c).

Hedging losses and impairments of US$658m were marginally ahead of estimates while STO did a good job controlling costs during the second half.

FY22 guidance looks reasonable, with production guidance of 100-110mmboe and sales guidance of 110-120mmboe. STO set FY22 capex guidance at ~US$2,250- $2,400m, with major projects making up ~US$1,150-$1,300m.

STO is confident, outlining that it can self-fund all capex in 2022 if the Brent oil price averages US$65/bbl, vs current spot US$93/bbl, while STO aims to also strengthen its balance sheet with US$2-$3bn in sale proceeds from selldowns of PNG LNG, Dorado and/or Pikka (Alaska).

STO made it clear that a final investment decision (FID) on either Dorado or Pikka was not contingent on asset sales, although was clearly confident it would be able to secure some combination of deals to achieve its objective.


Lingering fears around STO’s balance sheet still look misplaced to us. The strong earnings environment should already be undermining funding concerns, while sell downs on PNG LNG if not Dorado and Pikka will help STO stick below its new gearing target of 25% (reduced from its previous peak gearing target of 35%).

While in our view unlikely, ultimately if STO did feel some balance sheet pressure it could also dial back the pace of development given its strong control over its assets (the operator of most core assets and largest equity owner in PNG LNG).

What was also clear in the result briefing is the focus on broadening STO’s investment profile beyond just growth. STO’s strategic review is looking at opportunities for dividend growth, share buybacks and new paths for growth. We see this as the next logical step in STO’s evolution with the oily boasting an FCF yield of ~14%.

Forecast and valuation update

In addition to updating our model for the 2H21 result, we have increased the assumed government-take of production barrels under the Bayu Undan PSC to reflect STO guidance, lowering our group sales forecast to 115mmboe (from 117mboe). We have increased our FY22 capex post guidance to US$2.2bn, bringing forward some assumed Dorado/Pikka construction spend, increasing sustaining capex assumptions reflecting guidance, and including ongoing restoration spend (US$200mpa). We have also rolled our model forward.

Post these changes our valuation-based target price has been revised to (login to view).

Investment view

We maintain our Add rating and (login to view) target price, with STO remaining one of our top sector preferences. We see 2022 as a year STO will de-risk core growth projects and further build on strong investor sentiment.

Price catalyst

FID on Barossa and Pikka.

Asset sales on PNG LNG, Dorado and/or Pikka.  


Energy resource demand drivers. Execution risk around growth.

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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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