Projects expected to deliver a 30% increase in Santos’ (ASX: STO) group production by 2027 are tracking to plan. Barossa LNG is 97% finished with first gas slated for this quarter. Pikka Phase 1 in Alaska is 89% complete and on target for oil in mid-2026.

Why it matters: Development projects are within cost and schedule guidance. In full swing, they should lift Santos’ output to around 125 million barrels of oil equivalent. It is creditable that gearing sits at just 20.5% so near to first production and maximum project spending.

  • Barossa and Pikka represent strong long-term production. But additional high-quality development options Dorado oil, Narrabri gas, PNG LNG, and Alaska North Slope could ultimately support group production near doubling on 2024 levels.
  • The latter could prove moot if XRG’s bid succeeds. But it is subject to due diligence, a Santos shareholder vote, and regulatory approval.

The bottom line: Our AUD 9.50 fair value estimate for no-moat Santos stands. This remains at the approximate midpoint of our unchanged AUD 10 stand-alone fair value estimate and the AUD 8.89 indicative bid proposal from XRG Consortium. At around AUD 7.75, we think the market overly bearish.

  • Our fair value still assumes a five-year group EBITDA compound annual growth rate of 11% to USD 5.8 billion by 2029. This includes near-70% production increase toward 150mmboe, capturing growth first from new projects Barossa LNG and Pikka phase 1, and later from Dorado oil, and PNG LNG.

Coming up: We forecast 2025 EPS of AUD 0.40. Second-quarter production of 22mmboe was in line with expectations. Santos has slightly narrowed full year production guidance to 90-95mmboe from 90-97mmboe, with flooding in the Cooper basin tempering the upside.

  • Guidance for unit production costs improves slightly to USD 7.00-7.40 per boe, following a strong first-half performance, and unit costs expected to moderate in the second half with Barossa LNG’s commissioning.

Barossa first production imminent

Santos is the second-largest Australian pure oil and gas exploration and production company (behind Woodside Petroleum, ASX:WPL), with interests in all Australian hydrocarbon provinces, Indonesia, and Papua New Guinea. Well-timed East Australian coal seam gas purchases and subsequent partial sell-downs bolstered the balance sheet and set the scene for liquid natural gas, or LNG, exports. Santos is now one of Australia’s largest coal seam gas producers and continues to prove additional reserves. It is the country’s largest domestic gas supplier.

Coal seam gas purchases 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 1,400 million barrels of oil equivalent, primarily East Australian coal seam gas. Coal seam gas has grown to represent more than 40% of group 2P reserves, despite partial equity sell-downs.

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 42% 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 happier future for Santos now that excess debt levels are addressed, aided via improved margins and earnings driven by Gladstone and PNG LNG. The company increasingly enjoys export pricing on its gas. In addition to Santos’ Gladstone LNG, several other third-party east-coast LNG projects conspire to drive domestic gas prices higher. As the largest domestic gas supplier, Santos can expect significant bang for its buck, with limited additional capital or operating cost required to capture enhanced prices. The group production profile is simplified with increased certainty in project life.

Santos 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 1.7 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.

Santos 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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