Santos Limited

STO Details

Barossa FPSO Contract Awarded: Santos Limited (ASX: STO) is engaged in exploring natural gas along with the 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 has been awarded with Floating Production, Storage and Offloading Vessel (FPSO) contract as an operator of the Barossa joint venture. The FPSO will be built in South Korea and Singapore and will be transferred to the field where it will process natural gas. As per the company’s management, FPSO contract will aid company to achieve significant financial saving by optimising its operating cost and able to reduce carbon footprint.

Update on Ningaloo Vision: As per the company report on 26 March 2021, STO has resumed production at Ningaloo Vision as a part of their second phase of infill drilling in the Van Gogh field. The company is expecting a production of ~10,000 barrels per day in few weeks and targeting ~10 mn barrels of gross reserves from the second phase of Van Gogh infill.

Financial Highlights for FY20: The company have registered a higher sales volume and production volume in FY20, but due to lower price realisation, STO has posted a decline in its sales revenue to US$3,387mn in FY20 as compared with US$4,033mn in FY19. The average realised price declined significantly to US$47.7 per barrel in FY20 as compared with US$72.0 per barrel in FY19. The company has registered a net loss of US$357mn in FY20 as compared with net profits of US$674mn in FY19.

Sales and Profit/Loss (Source: Company Reports)

Outlook: STO is forecasting a free cash flow of ~1.1bn (Including Hedging) in 2021 at current oil prices. The company is expecting to deliver cash flow breakeven oil price of <$25 per barrel before hedging. The company has enough liquidity to fund its growth as there will be no debt maturities until 2024. 

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: In the last one month, STO has increased by 0.56% and by 12.40% in the last three months. The current market capitalisation of STO stands at ~$14.74bn as on 26 March 2021. The stock is currently trading above the average of its 52-weeks’ price level range of $3.20-$7.80. On the technical analysis front, the stock has a support level of ~$6.90 and a resistance of ~$7.28. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of a high single-digit upside (in % terms). We believe that the company can trade at slight discount as compared to its peer average, considering lower price realisation leading to lower revenues, net loss in FY20 and decline in free cash flow. For the purpose, we have taken peers Byron Energy Ltd (ASX: BYE), Woodside Petroleum Ltd (ASX: WPL), Peninsula Energy Ltd (ASX: PEN), to name a few. Considering a resumption of drilling at Ningaloo Vision, winning of contract awards, decent outlook, valuation, current trading levels, we recommend a “Hold” rating on the stock at the current market price of $7.160, increased by 1.129% as on 26 March 2021.

STO Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Byron Energy Limited

BYE Details

Refinancing of US Debts: Byron Energy Limited (ASX: BYE) is involved in oil and gas exploration in the Gulf of Mexico, the United States, and has its headquarters in Australia. The company is the operator and working interest holder of several blocks in the Gulf of Mexico prospective for oil and gas. The company's subsidiaries include Byron Energy (Australia) Pty Ltd, Byron Energy Inc. and Byron Energy LLC. BYE has announced regarding its ongoing refinancing of US debts for which the company has to complete new interim reserve report. The company has received a permit for a revised Development Operations Coordination Document (DOCD) on 10 February 2021. It will allow BYE to use the slots G5 through G9 from the South Marsh 58 G platform.  

Financial Highlights for 1HFY21: The company have registered a higher natural gas sale from the commencement of SM58 G1 and G2 wells production, resulting BYE to record an increase in its revenues in 1HFY21. Due to higher lease operating expenses, amortisation and gas transportation charges, the cost of sales went up to US$9.2mn in 1HFY21 as compared with US$3.62mn in 1HFY20. The net profits increased to US$0.73mn in 1HFY21 as compared with US$0.50mn in 1HFY20.

Revenues and Profit Growth (Source: Company Reports)

Risks: The company is exposed to the risks related to the fluctuation in the price of oil and gas, as it could impact the company’s financial performance. Drilling risks and the associated costs can adversely impact the company.

Outlook: The company is expecting higher inventory through its SM66 lease and it is likely to be contributing with significant hydrocarbon. The company will be accelerating its well drilling efforts after gaining permission for SM58 G platform. 

Valuation Methodology: EV/EBITDA based Relative Valuation Method (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: In the last one month, BYE has decreased by 12.49%. The current market capitalisation of BYE stands at ~$150.84mn as on 26 March 2021. The stock is currently trading below the average of its 52-weeks’ price level range of $0.110-$0.315. On the technical analysis front, the stock has a support level of ~$0.13 and a resistance of ~$0.151. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of a low double-digit upside (in % terms). We believe that the company can trade at some discount as compared to its peer median, considering a significant decline in cash and cash equivalents as at December 2020 and decline in gross profits. For the purpose, we have taken peers Australis Oil & Gas Ltd (ASX: ATS), Central Petroleum Ltd (ASX: CTP), to name a few. Considering decent results of 1HFY21, drilling permits and exploration planned for FY21, valuation, current trading levels, and key risks associated with the business, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.140, down by 3.449% as on 26 March 2021.

BYE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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