Kalkine Resources Report

SANTOS LIMITED

Nov 04, 2015

| Read Time :10 Mins

STO:ASX

Investment Type

Large-cap

Risk Level

Action

Rec. Price ($)

Company Overview - Santos Limited is an oil and gas producer. The Company's principal activity is the exploration for, and development, production, transportation and marketing of, hydrocarbons. It has an Asian portfolio, with a focus on three core countries: Indonesia, Vietnam and Papua New Guinea. It has interests in four liquid natural gas (LNG) projects, comprising GLNG, PNG LNG, Darwin LNG and Bonaparte LNG. Its business units include Asia Pacific, Eastern Australia, GLNG, and Western Australia and Northern Territory. The Asia Pacific unit includes operations in Indonesia, Papua New Guinea, Vietnam, India, Malaysia and Bangladesh. It is a producer of natural gas, gas liquids and crude oil in eastern Australia. It sells gas to domestic retailers and industry while gas liquids and crude oil are sold in the domestic and export markets. It produces domestic natural gas in Western Australia and is also a producer of gas liquids and crude oil. It also has an interest in the Bayu-Undan/Darwin LNG project.

Solid LNG Sales volume: Santos Ltd(ASX:STO) reported that itsLNG sales volumes surpassed 1 million tonnes during the third quarter and LNG sales volumes more than doubled during this year. Santos recently reported a third quarter production of 14.5 million barrels of oil equivalent, which rose by 4% against pcp as well as improved by 10% during this year-to-date. Quarterly crude oil production also rose by 16% as compared to the prior quarter to 2.1 million barrels on the back of the re-contribution from the Mutineer Exeter/Fletcher Finucane production in July post the maintenance activities. Meanwhile, Santos overall sales from gas, ethane and sales gas to LNG production reached 64.9 petajoules during the third quarter which is 7% above the corresponding quarter of last year driven by the solid sales gas to LNG volumes during the quarter which delivered a 30% increase. On the other hand, the group’s overall sales from gas, ethane and LNG sales revenues reduced by 24% yoy to $808 million during the quarter on the back of decrease in LNG prices as well as third party volumes decline. The average realized oil prices fell by 38% yoy to A$71 per barrel as compared to the pcp and was 14% lower as compared to prior quarter. Overall crude oil sales revenue fell by 3% during the period as compared to the previous quarter to $267 million due to commodity price volatility impact despite higher sales volumes.

Third quarter production performance highlights (Source: Company Reports)

First production shipped from GLNG: Santos GLNG project development comprised building of CSG resources in the Bowen and Surat Basins in southeast Queensland, a 420-kilometre underground gas transmission pipeline construction to Gladstone, as well as two LNG trains having a combined nameplate capacity of 7.8 mtpa on Curtis Island. GLNG project’s estimated gross capital cost was USD 18.5 billion. The Train 1 LNG production started during September and accordingly the first shipment of LNG was sent to South Korea in October carried by Seri Bakti, a Malaysian-owned LNG carrier. The group got the approval of next phase of upstream development during the third quarter along with the consent of the Roma West 2B project, wherein Phase 2B includes developing further Roma wells and 140 TJ/day of incremental compression capacity at the present Roma Hub. Santos estimates the drilling of the first Phase 2B wells to start by the end of this year. STO finished the hot tap on the gas transmission pipeline for the Meridian interconnect during the period with gas currently flowing from the Meridian joint venture. Meanwhile, the second train development work at Curtis Island is on track and Santos estimates the Train 2 to start by this year-end while first LNG from train 2 might be delivered from the second quarter of 2016.

Seri Bakti carrying the first LNG cargo from GLNG (Source - Company Reports)

Rejected Scepter Partners acquisition proposal: The group received anon-binding proposal from Scepter Partners to acquire all of Santos for a cash consideration of $6.88 per share. However, the group’s management did not accept the proposal and rejected the offer from Scepter partners as they felt the deal was opportunistic and did not even generate the fair underlying asset value of the company. On the other hand, Santos reported in August that it would make strategic review of all the options and would continue to consider all proposals to generate certainty as well as maximize shareholder value. The group further made head-count reductions in its Eastern Australia business and with these job cuts coupled with other additional group’s efforts would generate over $100 million in cost savings across its Cooper Basin activities in the coming three years.

Santos 1H 2015 Production (Source - Company Reports)

Sold Stag field to Sona Petroleum: According to the latest Reuters report, Santos made a deal with Sona Petroleum, a Malaysian based company to exit the Stag oil field of northwestern Australia. Sona intends to pay for the acquisition through the cash it raised during its initial public offering earlier. Moreover, Sona estimates to prolong the life of the Stag field, by adding new wells to enhance oil recovery as well as decided to take over environmental liabilities that might be incurred during the end of the Stag oil field's life. On the other hand, Santos was seeking to sell its non-core assets to repay its $8.8 billion of net debt. The group put its entire stake in Stag for sale during August. Although Stag generated a solid production performance during its tenure, the group believes that the field is now matured and hence would not be under its primary focus. Based on the Reuters report, Sona Petroleum reported that it agreed to acquire Santos Stag field and Quadrant Energy, a private firm for $50 million. Meanwhile, Santos did not comment on the rumors of the group’s intentions to sell down its 13.5% stake in the Papua New Guinea liquefied natural gas (PNG LNG) project to Japan's Marubeni Corp. As per the bid from Woodside Petroleum for Oil Search Ltd, the reuters report indicated that the stake might be worth of $6.5 billion.

Positive exploration results: The group’s Joint venture project with drillsearch and Sundance Energy for Washington -1 well at PEL 570 confirmed gas shows across Toolachee, Epsilon and Patchawarra formations and accordingly the well was cased and suspended for future. The preliminary results for the well indicated the presence of further Permian source rock section in the Toolachee formation as compared to the neighboring offset wells. As per south Australian oil project highlights, (joint venture with Beach and Origin with Santos having 66.6% stake) the five well program in greater limestone creek area had two appraisal wells and one near field exploration well. The fourth well in south Australian gas- Tirrawarra-86 was also cased and suspended post the intersection of oil and gas pay in target zones and on track with estimates. With regards to the Queensland gas project highlights (joint venture with Beach and Origin), Whanto south west-1 well is on track with pre drill estimates and thus the well was cased and suspended.

Washington-1 exploration well (Source: Company Reports)

Stock Performance: The shares ofSantos Ltd (ASX: STO) declined over 31.2% (as of Nov 2) in the last six months on the back of falling oil prices leading to the group’s top line pressure despite improving production and volumes. Santos revenues plunged over 15% yoy to $1.6 billion in the first half of 2015 financial year, while reported a 24% yoy decline in the third quarter. On the other hand, the group’s shares delivered an outstanding performance during the month, driven by positive exploration results, solid LNG volumes in the third quarter despite revenues pressure and the successful exit of its Stag oil field (based on Reuters report). Accordingly, the STO stock gained over 42% in the last four weeks alone (as of Nov 2). Management reported that its PNG LNG as well as Darwin LNG performed well during the quarter, and with GLNG’s first production delivery, Santos estimates a solid fourth quarter LNG sales volume performance as well. The group’s cost cutting efforts are also on track, and STO even decreased its capital expenditure guidance for 2015 by 10% to $1.8 billion. Meanwhile, Santos issued a Production guidance of 57 to 59 mmboe during 2015 as compared to its earlier estimated production range of 57 to 64 mmboe. With Santos rejecting the Scepter Partners acquisition proposal, the sentiment towards the group enhanced further given its solid strategic decisions for the benefits of the shareholders. The group also has a decent dividend yield of 5%. We maintain our positive stance on the stock and believe STO stock has the potential to grow further in the coming months. Based on the foregoing, we reiterate our “BUY” recommendation to the stock at the current price of $5.99.

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