Santos: Robust Performance Means Guidance Is Maintained; Development Projects Advance

Our AUD 12.30 fair value estimate for no-moat Santos STO stands. We see no longer-term implication in Australia’s second-largest oil and gas producer reporting better-than-expected average third-quarter oil and gas price achievement, only partially offset by marginally lower-than-anticipated production.

Third-quarter production rose 2% to 23.3 million barrels of oil equivalent, slightly missing our 24.2 mmboe target. Lower-than-expected gas production from Western Australia more than overshadowed better-than-expected performances from PNG LNG and persisting Bayu-Undan-related Darwin cargoes. Maintenance crimped Varanus Island and Devil Creek facilities in July and August, but group average price achievement increased 2% to USD 58.55 per boe, well ahead of our USD 53.95 forecast. Bayu-Undan keeps on keeping on, with at least one more LNG cargo expected out of Darwin LNG, to be followed by sales into the Australian domestic market until the Bayu-Undan field finally exhausts in the fourth quarter. This and associated high realized prices from Darwin LNG feature in the solid third-quarter price achievement for the group overall.

Continued progress on development projects is also pleasing. Work on the Barossa field, which will backfill the Darwin LNG plant in replacement of Bayu-Undan, is now 68% complete. That said, in a sign of the times, Santos along with Woodside, is experiencing some approval delays. Drilling remains suspended pending acceptance of the environmental plan by the regulator. We don’t expect a material impact on the timeline, and in a fillip, Santos will begin pipe-laying after meeting updated regulatory requirements.

At around AUD 7.85, Santos shares remain undervalued in 4-star territory. Effective delivery of the Barossa project is a key potential catalyst for price appreciation toward fair value. So too is progress is on the Papua LNG project in PNG.