Santos Ltd

Strong Performance in 1H 2018 with almost double the underlying profit & acquisition of Quadrant Energy:Santos Ltd.’s (ASX: STO) stock has risen 18.31% in three months as on August 23rd, 2018 as the company for 1H 2018 has posted strong performance due to 23% rise in EBITDAX to US$883 million and 22% increase in free cash flow to US$367 million. The company has almost doubled the underlying profit after tax to US$217 million, reduced the net debt to US$2.4 billion and reinstated dividends to shareholders. STO has declared to pay a fully-franked US3.5 cents per share interim dividend, which is the first dividend payment to shareholders since 2016 and reflects the company’s confidence for future prospects.
 
STO is on track to supply about 70 PJ of gas into the east coast domestic market in 2018, which is approximately 13 per cent of expected demand. Further, oil production has reached the highest in four years and unit production costs per barrel fell down 13% in 1H 2018. Meanwhile, STO has acquired 100% of Quadrant Energy for the consideration of US$2.15 billion plus potential contingent payments related to the Bedout Basin. This acquisition is fully funded from existing cash resources and new committed debt facilities, with rapid de-gearing expected to <30% by the end of 2019. The acquisition will increase proforma 2P reserves by 220 mmboe, up ~26% and proforma annual production by 19 mmboe, up ~32%.
 
ROE for the group has been improving from -25.8% in 2015 to -14.4% in 2016 to -5.1% in 2017. Given the expected upside, we maintain a “Hold” recommendation on the stock at the current price of $ 6.890 while the P/E level at 42.8x looks higher relative to many peers.
 

FY 1H 18 Financial Performance (Source: Company Reports)
 

South32 Ltd

Maintaining good return on equity with decent FY 18 Performance: South32 Ltd (ASX: S32) has added 43 Mt of Ore Reserves from the Marradong West Area. On the other hand, S32 for FY 18 has reported 9% rise in revenue, 8% rise in profit after tax, 16% growth in underlying earnings to US$1.3B, free cash flow from operations of US$1.4B and a closing net cash balance of US$2.0B. As at 30 June 2018, Net tangible assets per ordinary share were up to US$2.05 from US$1.91 as at 30 June 2017. The company has declared to pay a final dividend of US 6.2 cents per share (fully franked) for FY 18. During FY 18, S32 has achieved record production at Australia Manganese and Mozal Aluminium, posted a 10 per cent rise in total manganese ore production and a 20 per cent increase in payable nickel production at Cerro Matoso. The group has maintained a decent ROE of over 12% in FY18 and FY17. Meanwhile, S32 stock has fallen 10.24% in three months as on August 23rd, 2018  and is trading at a P/E of 9.80x. Based on the foregoing, we give a “Hold” recommendation on the stock at the current price of $ 3.390.

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