Australian hydrocarbon producer Santos (ASX:STO) reported a 1% increase in first-quarter 2026 production to 22.5 million barrels of oil equivalent, or mmboe. Revenue rose 3% to USD 1.27 billion with a 6% jump in average pricing more than countering softer volumes due to inventory build with cyclone activity.

Why it matters: Production was broadly as expected, and Santos maintains 2026 guidance. Importantly, projects expected to deliver a 30% production increase by 2027 are complete. Production from Barossa and Pikka is expected to ramp during second-quarter 2026.

  • Santos maintains 2026 guidance items, including 101-111 mmboe of production, USD 1.95 billion-USD 2.15 billion in capital expenditures, and unit production costs of USD 6.95-USD 7.45 per boe. We assume slightly lower than mid-guidance range production of 104 mmboe.
  • Our 2026 underlying EPS forecast declines 7% to USD 0.62 on weakening in spot Asia LNG futures, still a 120% increase on 2025’s USD 0.28. The impact of the Iran conflict-fueled commodity price rises should evidence more fully in the second quarter with revenue to jump by around 30%.

The bottom line: Our $11.10 fair value estimate for no-moat Santos stands. With shares around $7.70, we think the market remains overly bearish, potentially not crediting PNG LNG expansions or Dorado oil. We assume these additional projects come online at decade’s end.

  • Our fair value assumes a five-year group EBITDA CAGR of 15%, to USD 6.2 billion by 2030. This includes a near-80% production increase to over 150 mmboe, driven initially by new projects Barossa LNG and Pikka phase 1, but later by Dorado oil and PNG LNG.
  • We assume a midcycle EBITDA margin of 78% excluding third-party sales. This betters 2025’s 73%, anticipating lower costs from Barossa and Pikka in addition to USD 150 million or 150 basis points to EBITDA margin in flagged annual structural cost savings. Second-half 2025 margin improved to 75%.

Solid First-Quarter Performance From Santos With High Prices to Hit in the Second Quarter

Santos is the second-largest Australian pure oil and gas exploration and production company (behind Woodside), with interests in all Australian hydrocarbon provinces, and Papua New Guinea. Santos is now one of Australia’s largest coal seam gas producers with substantial reserves. It is the country’s largest domestic gas supplier.

Coal seam gas purchases in the mid-2000s increased reserves, and partial sell-downs generated cash profits, putting Santos on solid ground to improve performance. Group proven and probable, or 2P, reserves doubled to 1.4 billion barrels of oil equivalent, primarily East Australian coal seam gas. Coal seam gas now represents around 20% of 1.6 billion barrels group 2P reserves.

A degree of confidence can be drawn from project partners. US energy supermajor ExxonMobil, the world’s largest publicly traded oil and gas company, is 33% owner and the operator of the PNG LNG project. The Gladstone LNG project was built and is operated by GLNG Operations, a joint venture of owners Santos (30%), Petronas (27.5%), Total (27.5%), and Kogas (15%). Petronas is Malaysia’s national oil and gas company and the world’s second-largest LNG exporter. French energy major Total is the world’s fifth-largest publicly traded oil and gas company, and Korea’s Kogas is the world’s largest buyer of LNG. Santos is in good company.

Overall, we see a solid future for Santos, aided via improved margins and earnings driven by Gladstone and PNG LNG. The company enjoys export pricing on its gas. In addition to Santos’ Gladstone LNG, several other third-party east-coast LNG projects conspired to drive domestic gas prices higher. As the largest domestic gas supplier, Santos gets significant bang for its buck, with limited additional capital or operating cost required to capture enhanced prices.

Bulls Say

  • Santos is a beneficiary of continued global economic growth and increased demand for energy. Aside from coal, gas has been the fastest-growing primary energy segment globally. The traded gas segment is expanding faster still.
  • Santos is in a strong position, with 1.6 billion barrels of oil equivalent proven and probable reserves, predominantly gas, conveniently located on the doorstep of key Asian markets.
  • Gas has about half the carbon intensity of coal, and stands to gain market share in the generation segment and elsewhere as carbon taxes are rolled out.

Bears Say

  • Santos committed to substantial LNG capital expenditures, which will see the balance sheet geared in the medium term.
  • Much of the company’s perceived value is in coal seam gas to LNG projects that are yet to reach full capacity
  • Landholder opposition to coal seam gas development could hinder production growth.

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