Company Overview - Santos Limited is an oil and gas company. The Company is engaged in the exploration for, and development, production, transportation and marketing of, hydrocarbons. The Company develops major oil and gas liquids businesses in Australia and operates in all mainland states and the Northern Territory. The Company has exploration-led Asian portfolio, with a focus on three core countries: Indonesia, Vietnam and Papua New Guinea. The Company operates in four business units of Eastern Australia, Western Australia and Northern Territory, Asia Pacific and Gladstone liquefied natural gas (GLNG). The Asia Pacific operating segment includes operations in Indonesia, Papua New Guinea, Vietnam, India and Bangladesh. The Company is a producer of natural gas, gas liquids and crude oil in eastern Australia. Santos produces domestic natural gas in Western Australia and is also a producer of gas liquids and crude oil.
Analysis - Santos Ltd (ASX: STO) quite recently reported for strong results with regards to its March 2015 quarter. The March quarter of 2015 production rose 15% to 14 millions of barrels of oil equivalent (mmboe), while sales volume increased 10% to 15.2 mmboe, as compared to the same quarter of the previous year. The company was successful to decrease the capital expenditure by 40% to A$566 million, as a part of its initiative to decrease the production costs. Meanwhile, sales revenue decreased 10% in year over year terms to $825 million, as the average realized oil prices fell to A$72 per barrel from A$129 per barrel in March quarter of 2014.
March Quarter 2015 highlights (Source: Company Reports)
As per the highlights, STO reported a major oil discovery at Bestari-1 exploration well offshore in Malaysia, and the well came across 67 meters of high quality net oil pay in multiple sand packages, in the primary Miocene age formation.
Total gas, ethane and LNG sales revenue increased 78% in year over year terms to $520 million during the quarter. With regards to the dry dock maintenance of the Mutineer-Exeter/Fletcher Finucane FPSO, crude oil production of 2.0 million barrels decreased 22%, as compared to the prior quarter. Consequently, crude oil sales revenue decreased 42% during the period.
First quarter of 2015 drilling highlights (Source: Company Reports)
With regards to the Cooper Basin Gas and gas liquids, higher drilling activity in 2014 partly led to the higher gas and ethane production, to 14.9 petajoules (PJ) in the March quarter, as compared to 14.5 PJ in the first quarter of 2014. The final well of the Big Lake infill drilling program, Big Lake-133 was finished during the quarter. Nephrite field’s Nephrite South-12 and -13 as well as Narie field’s Coonatie-21 and -22 and Narie-5 were drilled, and cased and suspended for the future.
For the Carnarvon project, decrease in customer nominations led to the decrease of gas production by 5% to 13.8 PJ. Presence of FPSO in dry dock led Mutineer-Exeter/Fletcher Finucane wells offline, resulted in the decrease of total oil production to 383,400 barrels as compared to the previous quarter. STO entered in a contract to provide natural gas to Alcoa, and the contract is expected to start in 2018. The company will provide 82PJ of gas to Alcoa during the primary five years of the contract.
With regards to the western wet gas fairway, STO represents 60% of stake in this project along with Drillsearch (which holds 40%). Last month, Emery-1, the seventh well was cased and suspended as a future gas producer. Emery-1 was drilled to total depth of 3,262 meters. The wireline logs calculated over 18.6m of net pay through several zones in Patchawarra formation, having a gross interval of 533m and over 7.7m of net pay in Tirrawarra sandstone having gross interval of 37 meters. This discovery kind of de-risks the Western Cooper Wet Gas Program.
Western Wet Gas (Source: Company reports)
As per the South Australian gas, STO holds 66.6% of stake along with Beach (20.2%) and Origin (13.2%). The first well Swan Lake?13, out of the five wells development in Patchawarra Formation, reached total depth last month. Meanwhile the two well drilling programs at Narie field, which is located in the area of Patchawarra Trough and over 40 kilometers north of Moomba was completed. The second well, Narie 4 was completed last month, and is cased and suspended as a potential producer.
With regards to the Coonatie Field, which is located over 80 kilometers north?east of Moomba, STO holds 72.32% stake, while beach and Origin accounts 17.1% and 10.5% respectively; three wells development program was completed with the last well, Coonatie?23 being cased and suspended as future producer.
The company is seeking to leverage its current LNG portfolio as well as looking to develop new LNG infrastructure and capabilities, to capitalize the raising demand of LNG in the world. While the company’s Darwin LNG and PNG LNG are under production, GLNG project is under construction and is almost 95% complete. First LNG from the company’s GLNG project is expected to be from the third quarter of 2015.
LNG Portfolio (Source: Company Reports)
STO’s PNG LNG and Darwin LNG sales revenue delivered an increase of 340% in the first quarter of 2015 to A$276 million from A$63 million in first quarter of 2014. Gross gas production for PNG LNG reached 103.5 PJ and the company shipped 24 LNG cargos during the quarter.
The company’s GLNG project, was approved in 2011 and the project’s development comprised a 420-kilometre underground gas transmission pipeline to Gladstone and two LNG trains with a total capacity of 7.8 mtpa on Curtis Island and development of CSG resources in the Bowen and Surat Basins in south-east Queensland. With regards to GLNG Upstream highlights, the upstream facilities are now supplying gas to LNG plant on Curtis Island through the 420-kilometre gas transmission pipeline. Moreover, the performance of the 347 Fairview wells has exceeded expectations. In addition, the 120 Roma wells are growing as per expectations and one development well is able to produce 2.1 TJ/day. In the GLNG acreage, 16 wells were drilled during the March quarter, which comprised one appraisal well in Fairview and 15 development wells in Roma. During the quarter, Fairview 4 as well as Fairview 5 gas processing hubs; and 120-kilometre Comet Ridge to Wallumbilla pipeline loop were commissioned and completed. Roma 2 hub is giving electrical power to the field and is almost finished.
The company has indicated its plans of selling the Gladstone LNG gas pipeline sometime next year to raise funds to bring in positive free cash flow despite plummeting oil prices. Of course, this step would be subject to various evaluations and conditions.
March 2015 Fairview well performance (Source: Company Reports)
As per the GLNG downstream highlights, the first gas to the LNG plant on Curtis Island was started in March 2015 and the main flare was lit. Piping and cabling at LNG Train1 is on track while installation and cable pulling at LNG Train 2 is underway. The second train is expected to be ready by the third quarter of 2015. Drying and nitrogen purging for both tanks as well as LNG loading jetty are completed. First gas has flowed during March 2015 with the completion of QGC interconnects.
GLNG March 2015 flare stack, Curtis Island (Source: Company Reports)
GLNG project’s gross capital cost is estimated to be a total of $18.5 billion from the final investment decision to end of the year 2015. For the future (that is from 2016 to 2020), upstream is expected to incur major expenditure for drilling and completing new walls (estimates 200 per annum), new wall connections, compression facilities, workforce wages, exploration and appraisal.
GLNG Capital Expenditure Guidance (Source: Company Reports)
The company’s Bayu-Undan/Darwin LNG has a good track record of delivering 450+ cargoes from 2006. The first gas from Bayu Undan Phase 3 is delivered during the quarter and witnessed growth in liquid production as compared to the previous quarter. The company’s net entitlement to production rose to 190,500 barrels of condensate, 10,400 tonnes of LPG and 4.9 PJ of gas during the quarter. Improved plant efficiency has led to a slight increase of the project’s gross gas production to 55.3 PJ.
Darwin LNG Plant (Source: Company Reports)
STO produces crude oil, natural gas and gas liquids in Eastern Australia and Western Australia. The company has presence in Indonesia, Papua New Guinea, Vietnam, India and Bangladesh in Asia Pacific regions. The company is seeking to focus on high margin business in Asia, which represented 27% of STO’s production in 2014. With the growing global demand for energy and especially in Asia, the company looks to capitalize this opportunity.
Asia Pacific presence (Source: Company Reports)
The company continues to focus on increased production by reducing costs. As per the full year of 2015, STO expects its production to be in the range of 57-64 mmboe, while production costs might be in the range of $14.2-14.6/boe. Capital expenditure (including exploration and evaluation, but excludes capitalized interest), is forecasted to be $2 billion for the year.
2015 Guidance (Source: Company Reports)
The company’s shares were under pressure for quite some time now, posting a decline in the last 52 weeks, as well as falling to multi year lows in April 2015. However, the shares bounced back a little this month. While the fluctuating oil prices might pose short term risks especially with regards to the Cooper basin potential, strong LNG portfolio with the GLNG project delivery this year, strategic move to gain Asia market and improving operating efficiency are expected to act as major drivers for STO.
STO Daily Chart (Source - Thomson Reuters)
Accordingly, we give a buy for this stock at the current price of $8.71.
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