Highlights

  • Macquarie holds an Outperform rating on STO with a price target of AUD 9.15, representing approximately 16.6% upside to the 28 May 2026 closing price of AUD 7.85.
  • Q1 FY26 production rose to 22.5 million barrels of oil equivalent, up 3% on the prior corresponding period, with the Barossa floating storage and offloading Facility achieving its first cargoes.
  • Free Cash Flow from operations reached approximately AUD 383 million for the quarter, with full-year 2026 guidance remaining unchanged.

 

Santos Limited (ASX:STO) shares closed at AUD 7.85 on 28 May 2026, easing 0.51% on the day. Despite a relatively quiet session, the stock continues to trade at a discount to Macquarie's Outperform price target of AUD 9.15 — a spread of approximately AUD 1.30 or 16.6%. That gap reflects a broader investor caution around the energy sector, particularly as geopolitical uncertainty and oil price Volatility weigh on risk sentiment globally. For a Business in the midst of executing two major project ramp-ups simultaneously, Santos occupies a position where near-term operational delivery will be the critical variable in re-rating conversations.

Q1 FY26 Production: Incremental Gains Across the Portfolio

Santos reported Q1 FY26 production of 22.5 million barrels of oil equivalent (mmboe), up 1% on the prior quarter and 3% year-on-year. Sales Revenue reached approximately AUD 1.27 billion for the quarter, a 3% improvement on the prior quarter. Free cash flow from operations came in at approximately AUD 383 million, broadly in line with the prior quarter.

The production result was aided by the Barossa floating production, storage, and offloading facility achieving its first cargoes during the quarter. While the Barossa FPSO was subsequently taken offline for maintenance — specifically to replace dry gas compressor seals — the company indicated it expects to recommence production ramp-up within days of the facility returning online, with LNG production to follow shortly after.

Pikka Phase 1: First Sales Oil in Sight

The Pikka Phase 1 development in Alaska reached mechanical completion early in Q1 FY26, followed by fuel gas introduction and dynamic commissioning through the quarter. Oil initiation for first tank and facility Fill activities was underway at the time of the quarterly update, with first sales oil into the pipeline network expected within weeks of the announcement date of 23 April 2026.

With 27 development wells drilled to date, 20 of which have been stimulated and flowed back in line with pre-drill expectations, the ramp-up toward plateau production is anticipated through the second quarter into early Q3 FY26. The Seawater Treatment Plant, which provides reservoir pressure support, is expected to be initiated once continuous and stable operations are achieved.

Existing Operations: Reliability and Record Performance

PNG LNG delivered plant reliability above 98% during the quarter, producing at an annualised run rate of approximately 8.6 million tonnes per annum. The GLNG asset in Queensland maintained stable Upstream production, with LNG output at a 5.8 Mtpa annualised rate and 24 contracted cargoes shipped during Q1. The Roma field achieved record daily production of 226 terajoules per day. In Western Australia, the Halyard-2 well continued to produce at a rate that has seen it recover more than 80% of its initial estimated 2P reserves over just 14 months of production, with no water breakthrough observed.

Alaska Appraisal: Quokka-1 Confirms Quality Reservoir

A significant operational development in the quarter was the successful completion of the Quokka-1 appraisal well in Alaska. The well confirmed a high-quality Nanushuk reservoir with approximately 143 feet of net oil pay and average porosity of 19%. Following a single-stage stimulation, the well achieved a flow rate of 2,190 barrels of oil per day. The Quokka discovery is located approximately 10 kilometres from the Mitquq-1 discovery well drilled in 2020, with reservoir sands correlating between the two. Fluid analyses confirm high-quality light gravity oil, which is expected to support strong well performance and improved pricing relative to Pikka crude. Management described Quokka as a material addition to the Alaska development runway.

Domestic Gas and Regulatory Developments

Santos secured a 10-year, 200 petajoule conditional gas sales agreement with the South Australian Government, which includes a pre-pay component supporting the company's Investment in the Moomba Central Optimisation project. The Moomba project is targeting over AUD 600 million in Capital and operating cost savings over the life of the Central Fields, with an expected internal rate of return exceeding 15%.

Progress was also made on the Narrabri Gas Project in New South Wales, with the Gomeroi people authorising a Voluntary Indigenous Land Use Agreement for the Hunter Gas Pipeline and Narrabri Lateral Pipeline. The company also worked constructively with Viva Energy and Ampol to maintain stable fuel Supply to Australian refineries during a period of global market disruption.

Guidance and Full-Year Outlook

Full-year 2026 production and financial guidance remains unchanged following the Q1 update. The company is managing cost pressures linked to Middle East instability, including higher active ingredient, freight and energy costs. However, the combination of Barossa returning to production, Pikka commencing first oil, and existing Assets performing at or above design capacity provides a production and revenue outlook that management has declined to revise downward at this stage.

Conclusion

Santos enters the second half of FY26 with its two most closely watched growth projects — Barossa and Pikka — at or approaching first production milestones. Q1 production grew 3% year-on-year, free cash flow held steady at AUD 383 million, and new operational achievements across the existing portfolio provide a backdrop of asset quality. With Macquarie holding an Outperform rating at AUD 9.15 against a current price of AUD 7.85, the convergence of multiple project deliverables in the near term places Santos in a position where operational execution will determine whether the broker's conviction proves well-placed.