Santos: Size of the prize

About the author:

Author name:

By Adrian Prendergast

Job title:

Senior Analyst

Date posted:

21 January 2022, 12:00 PM

Sectors Covered:

Mining, Energy

• A good end to the year for Santos (ASX:STO) with both 4Q21 production and sales revenue beating consensus estimates according to Visible Alpha data.
• Strong operational performances from WA and DLNG helped carry the result.
• Sales revenue for 4Q21 came in at US$1,532m (vs consensus US$1,401m).
• Barossa FID targeted for mid-2022. Pikka (Alaska) FID sometime during 1H22.
• We see an opportunity for STO to beat market expectations on synergies in its merger with OSH given the level of capital inefficiency we saw at OSH.
• We maintain our Add rating, with STO still trading at a large discount going into a catalyst-heavy 2022.

Solid 4Q21 operational & sales result

STO posted 4Q21 production of 22.9mmboe (+5% qoq), comfortably beating consensus estimates of 20.8mmboe. Although a mixed performance by asset, with the WA business (+15% vs consensus) and DLNG (+30% vs consensus) putting up impressive performances while PNG (-26% vs consensus) and Cooper Basin (- 10% vs consensus) fell well short of expectations according to Visible Alpha.

4Q21 group sales revenue of US$1,532m was also ahead of consensus at US$1,401m, and +34% qoq. While enjoying upside from rising oil and gas prices, the rate of increase is much slower than peer WPL, with STO less exposed to spot prices given its large fixed-price gas business in WA.

Getting on with growth, STO expects a final investment decision (FID) at its Barossa field by mid-2022, while FID is also expected at Pikka (Alaska) sometime during 1H22.

Analysis

We still expect STO to pursue an equity selldown at Pikka that includes giving away operatorship, this would materially reduce STO’s footprint in Alaska and management time for a similar result with the project nearing development.

The large consensus miss on PNG could be partly explained by some of the street mistiming the OSH merger, which was only effective from 11 December.

2022 is likely to be a year of bedding down the OSH merger and moving ahead with STO’s growth projects. We expect STO will be able to unlock larger synergies than its guided US$90-$115m pre-tax.

Based on the amount of capital efficiency we estimate sat within OSH’s business (high-cost Sydney office, Port Morseby and Anchorage offices, outsized G&A, and level of discretionary drilling in PNG and Alaska) in addition to the layers of duplication across corporate and PNG.

Forecast and valuation update

We have updated our 2021 forecasts for the 4Q21 result which has also seen some flow-on changes to our 2022 estimates for production and opex.

Applied updated house oil price forecasts to our estimates (summary further).

Investment view

STO remains one of our most preferred energy sector exposures. Given high market confidence we expect STO’s share price to outperform its reduced sensitivity to rising oil and gas prices as it works to de-risk growth and unlock value from its OSH merger. We maintain an Add rating with (login to view) target price.

We see STO as well placed to participate in the upcycle while also holding greater earnings protection through diversification than the rest of its Australian peers.

Price catalyst

The progress of development projects, potential for asset deals, and likely drip-feed of good news on synergies sets up 2022 as a catalyst-heavy year for STO.

2022 guidance to be set at full year result.

Potential PNG LNG selldown to Total. Selldown of equity in Pikka.

Risks

COVID related risks to operations and energy demand drivers.

Execution risk on developments projects.

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