Key Takeaways

  • Santos posted second-quarter production of 23.1 mmboe and first-half production of 45.6 mmboe, on sales revenue of US$1,349 million and US$2,620 million respectively.
  • Full-year 2026 production guidance was narrowed to 99 to 105 mmboe from 101 to 111 mmboe, with capital expenditure unchanged at about US$1.95 billion to US$2.15 billion.
  • The XRG-led consortium's A$8.89 per share indicative proposal was withdrawn in September 2025 and no renewed approach has been announced since.

Why Santos is back under the microscope

Santos Limited (ASX: STO), one of Australia's largest listed oil and gas producers, reports on a calendar year and in US dollars. It lodged its 2026 second quarter report on 23 July 2026.

The June quarter matters because 2026 is the year two of the biggest projects Santos has built move into steady production: Barossa LNG, offshore the Northern Territory and Pikka Phase 1 in Alaska.

The. On 27 July 2026 the stock closed around A$7.68, as Brent slid to about US$90.50 a barrel after a reported pause in United States and Iran hostilities drained a war premium.

What the second quarter report actually said

Production was 23.1 mmboe, taking first-half production to 45.6 mmboe. Sales volumes were 23.8 mmboe and 48.0 mmboe, on sales revenue of US$1,349 million and US$2,620 million. These are unaudited operating figures, not profit.

The guidance change cuts both ways. Santos narrowed 2026 production guidance to 99 to 105 mmboe from 101 to 111 mmboe, lifting the floor but removing six mmboe from the ceiling. Sales volumes are guided at 102 to 108 mmboe, with capital expenditure of about US$1.95 billion to US$2.15 billion unchanged.

Crucially, Santos said second-half production should rise around 20 to 30 per cent on the first half, with unit production costs held at US$6.95 to US$7.45 per boe.

Realised prices and the three-month JCC lag

Realised prices were strong. LNG averaged US$11.21 per mmBtu for the quarter, domestic gas US$5.55 per gigajoule, crude oil US$120.33 a barrel and condensate US$112.11. For the half, LNG averaged US$10.95 and crude US$91.68. LNG contributed US$901 million of quarterly revenue.

Chief executive Kevin Gallagher said the LNG price "remained strong, particularly against a backdrop of multi-year low JCC-linked pricing in the first quarter of 2026 which directly drives second-quarter realised pricing". He expects stronger second-half pricing, given average JCC above US$100 a barrel in the June quarter and the standard three-month lag.

Barossa: from first gas to 97 per cent of planned rates

Barossa took first gas into the BW Opal floating production vessel in September 2025 and the first LNG cargo left Darwin for Japan on 25 January 2026. Santos operates with 50 per cent, alongside PRISM Energy International Australia and JERA Australia.

By the June quarter Darwin LNG was running at 97 per cent of planned rates, loading cargoes roughly every eight days at 100 per cent quarterly reliability. On 27 July Santos announced the first Barossa condensate cargo, about 300,000 barrels loaded for a South Korean refiner.

Barossa is the backfill keeping Darwin LNG running for another two decades after Bayu-Undan ceased supply. The plant also reached financial completion on an US$800 million syndicated facility.

Pikka, Papua New Guinea and the Cooper Basin

Pikka Phase 1, in which Santos holds 51 per cent, began intermittent production in May 2026 and continuous production in June. Gross output was near 23,000 barrels a day against a targeted plateau of about 80,000 barrels a day gross in the September quarter, with first sales revenue expected in August.

In Papua New Guinea, PNG LNG ran above 98 per cent reliability at an annualised 8.7 Mtpa. Santos sanctioned two brownfield projects in the quarter, the Agogo Production Facility tie-in and PNG LNG oil infill drilling, targeting returns above 50 and 30 per cent. Papua LNG is on track for a final investment decision in the December quarter.

The Cooper Basin produced 6.1 mmboe in the half. Moomba carbon capture and storage injected about 357,000 tonnes of CO2 equivalent gross in the quarter, taking cumulative storage to two million tonnes since September 2024, against a 1.7 million tonne nameplate.

Why the second half should look different

The most revealing number is a negative one. Barossa and Pikka together recorded a combined free cash flow from operations loss of about US$151 million in the first half, against group free cash flow from operations of roughly US$378 million.

That is the arithmetic behind the second-half story: two assets that consumed cash while commissioning are meant to become the largest contributors to it. Santos told its May 2026 investor briefing that at plateau, every US$10 move in Brent above breakeven is worth an extra US$550 million to US$600 million a year.

Balance sheet, capital expenditure and the dividend

At 31 December 2025 Santos carried net debt of US$5,764 million, gearing of 26.9 per cent including leases or 21.5 per cent excluding them and liquidity of US$4,267 million. Its 2025 free cash flow breakeven was US$27.43 a barrel from operations and US$58.90 all-in, targeting US$45 to US$50 through 2030.

The dividend policy targets a minimum of 60 per cent of all-in free cash flow. Santos paid US 23.7 cents per share for 2025, a US 13.4 cent interim plus a US 10.3 cent final. The board said it will weigh full-year cash flow timing when setting the 2026 interim dividend, given first-half distortions. That is a caution, not a promise.

Principal risks investors should weigh

Commodity price exposure dominates. A realised crude price of US$120.33 a barrel reflects an unusually tight market and Brent near US$90.50 in late July shows how fast a geopolitical premium unwinds. The JCC lag that flatters second-half LNG pricing works against Santos on the way down.

Execution risk is real: Pikka must more than triple gross rates to reach plateau. Papua New Guinea carries fiscal and political risk ahead of any Papua LNG decision, Alaska is exposed to United States permitting shifts and decommissioning is a long-dated liability.

Then there is the register. The XRG-led consortium of XRG, ADQ and Carlyle made a non-binding indicative proposal in June 2025 at A$8.89 per share, worth about US$18.7 billion and withdrew it on 17 September 2025. No renewed approach has been announced and it was the third failed bid for Santos.

A balanced outlook

The idea that Santos is heading into a stronger second half is supported by its own disclosure: Barossa is near design rates, Pikka is producing and management has quantified the lift.

The counterweight is that narrowed guidance removed the optimistic end of the range, first-half cash generation was modest and the new volumes arrive into a softer oil price. Prices and multiples change continuously, nothing here is a recommendation and no producer with this exposure is low risk.