Company overview - Santos Limited is a natural gas company. The Company is engaged in the exploration, development, production and sales of natural gas both onshore and offshore. The Company produces liquid petroleum gas (LPG), ethane, methane, Coal seam gas (CSG), Liquefied natural gas (LNG), shale gas, condensate and oil. The Company's segments comprise its five key assets/operating areas: Cooper Basin; Gladstone LNG (GLNG); Papua New Guinea (PNG); Northern Australia, and Western Australia (WA) gas. The Company operates in Australia and Asia. Its Other Assets include Indonesia, Vietnam, East Coast Australia Gas, Western Australia oil, Victoria and onshore Northern Territory. The Cooper Basin produces natural gas, gas liquids and crude oil. GLNG produces LNG for export to global markets from the LNG plant at Gladstone. The Company's business in Papua New Guinea is centered on the PNG LNG Project. In Northern Australia, Santos has interest in the Bayu-Undan/Darwin LNG Project (DLNG).


STO Details

Turnaround strategy starting to deliver:  The group’s second quarter production fell 1% to 14.7 mmboe (million barrels of oil equivalent) against the last quarter but this was in line with estimates. However, sales volumes and revenues were higher than previous quarter primarily due to the timing of three PNG LNG DES cargoes shipped late March but delivered in April, combined with higher domestic sales volumes and higher. LNG prices Sales volumes enhanced 16% to 21.5 mmboe as compared to first quarter of 2017 while sales revenues rose 12% to US$769 million driven by better LNG prices and the timing of liftings. As a result, Santos enhanced the production and sales volume for 2017 to 57-60 mmboe and 75-80 mmboe respectively. Meanwhile, Santos also enhanced their drilling activity in Cooper Basin as well as across its GLNG acreage and accordingly expects further wells to improve their gas production in the coming years. Santos controlled their net debt position by US$600 million to US$2.9 billion as compared to 2016-year end and expects a free cash flow breakeven for 2017 which currently reached US$33 per barrel from US$47 per barrel at the beginning of 2016.  Further, it has been focusing to control costs while building a strong asset portfolio which could generate a major free cash flow despite the volatile oil price environment.


Q2FY17 comparative performance; (Source: Company reports)

Cooper Basin update: Sales gas and ethane sales volumes were lower than the previous quarter primarily due to lower spot sales, partially offset by higher gas sales to GLNG. Condensate and LPG sales volumes were lower than the previous quarter due to timing of liftings, while crude oil sales volumes were higher than the previous quarter due to timing of liftings and higher third-party volumes. Sales gas and ethane production was lower as gas capacity additions were offset by natural field decline, and condensate production was lower due to natural field decline and lower condensate yields. Moreover, higher crude oil production reflected new oil wells coming online offsetting natural field decline. During the quarter, fourteen development and appraisal gas wells were drilled, taking the total to 25 gas wells for the first half. Further, drilling cost and schedule efficiencies continue to be realized and Santos is targeting to drill 52 wells with two rigs in 2017, compared to 31 wells with the same two rigs in 2015. Of the nine development gas wells drilled in the second quarter, eight were cased and suspended for future production and one was drilling at quarter end. Of the two appraisals and three near-field exploration gas wells drilled in the quarter, three were cased and suspended for future production.


Cooper Basin sales volumes and revenue; (Source: Company reports)

Upstream equity sales gas production: During Q2FY17, Upstream equity sales gas production was 6% higher than the previous quarter and 36% higher than the corresponding quarter primarily due to production enhancements in Fairview and stronger field performance in Roma. Forty-one development wells were drilled in the GLNG fields in the second quarter, with a further 18 top holes batch-drilled and suspended for further deepening as at the end of the quarter. The GLNG Joint Venture (JV) produces liquefied natural gas (LNG) for export to global markets from the LNG plant at Gladstone. Santos is now targeting to drill approximately 170 GLNG wells in 2017, up from original guidance of 130-150 wells. Notwithstanding the higher upstream gas production, sales gas delivered to the LNG plant and LNG production were both lower than the previous quarter due to the planned four-week statutory inspection shutdown of LNG train 2 in June combined with the processing of GLNG gas at APLNG during their two-train completion test. However, gross daily production of 490 TJ/day from the Fairview field at the end of the quarter was ahead of forecast. All 12 wells of the Fairview infield project have been top-set and the project is over 40% complete. The Roma field continues to de-water and gross daily production of 42 TJ/day at the end of the quarter was in line with forecast. The Roma 2B project is over 90% complete, with 151 of 159 wells online, and the Roma 3A project is 70% complete, with all 29 wells now drilled and completions underway.


GLNG production and sales performance; (Source: Company reports)

Northern Australia sales and volumes down due to maintenances:  Darwin LNG sales volumes and production were lower than Q1FY17, due to planned maintenance, while condensate sales volumes and production were lower than the previous quarter due to natural field decline and planned maintenance. During the quarter, the two-well appraisal drilling campaign in the Barossa field was successfully completed, and positive results from the campaign, including a successful production test of Barossa-6, strengthened the field’s position as lead candidate to supply backfill gas to Darwin LNG. Further, the campaign significantly reduced resource uncertainty and confirmed the high deliverability potential of the primary Elang reservoir. Further, timely progress continues to be made with pre-Front End Engineering Design (pre-FEED) studies on the Barossa development concept. The development concept includes a Floating Production Storage and Offloading (FPSO) facility, subsea production system and a gas export pipeline, all located in Commonwealth waters. Subsurface data obtained from the appraisal program will now be integrated into subsurface models to support a FEED-entry decision in early 2018.


Northern Australia production and sales performance; (Source: Company reports)
 
Successful completion of Muruk 1ST3 production test:  Recently, the company announced positive production well test results from the Muruk 1ST3 exploration well in the Papua New Guinea Highlands. The production test was undertaken to assess reservoir productivity and recover hydrocarbon samples over the gas saturated Toro Sandstone interval, between 3,968 meters to 4,065 meters. The well flowed gas and condensate at a rate of 16 million standard cubic feet per day (mmscf/day) of gas on a 32/64” choke. The well rate was constrained by test facilities which limited tests to short flow and build up periods. Multiple hydrocarbon samples were collected for further analysis. Importantly, the Muruk drilling program confirms the discovery of a potentially significant new gas field, 21 kilometers northwest of the Hides production facilities. The data from the Muruk drilling program will be evaluated to assist in the definition of forward appraisal options, and well site preparations are being scheduled for late 2017 ahead of a potential Muruk appraisal program in 2018. PNG is one of Santos’ five core assets and the company is dedicated to work with its long-term partners in-country to find and develop oil and gas resources for backfill and/or expansion of existing projects. Muruk participants are affiliates of Santos (20%), affiliates of ExxonMobil (42.5%) and Oil Search (37.5%, operator).


Discovery of a potentially significant new gas field at Muruk; (Source: Company reports)

Strategic relationship with ENN and Hony Capital: In June 2017, Santos announced a strategic relationship with existing shareholders ENN Group (ENN) and Hony Capital (Hony). ENN and Hony are associated shareholders of Santos with an aggregate relevant interest of 15.1% of Santos shares. The strategic relationship will remain in effect for so long as ENN and Hony have a relevant interest in 15% or more of Santos shares. The relationship is based on mutual cooperation and assistance to support the growth of Santos, and it is the intention of ENN and Hony that Santos will be the primary investment vehicle for material investment by them in upstream gas reserves and LNG production in Australia and PNG.

Santos Ltd (ASX:STO) stock lost over 31% in the past one year, owing to subdued financial performance due to low oil prices and the recent new framework for the Australian Domestic Gas Security Mechanism to curb LNG exports if there is a domestic shortage. However, we believe that the correction in the stock price is a buying opportunity as it is trading close to 52-week low levels. Given the company’s focus and current progress on reducing costs, lowering net debt and robust asset portfolio that can generate significant free cash flow in a lower oil price environment, we give a “Buy” recommendation on the stock at the current market price of $3.39


STO Daily chart; (Source: Thomson Reuters)

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