Santos Limited

STO Details

Signing of Gas Supply Agreement: Santos Limited (ASX: STO) is engaged in the exploration, development, production and marketing of hydrocarbons. The market capitalisation of the company as on 21 April 2021 stood at ~$14.62 billion. As per a recent update on 21 April 2021, the company has announced that it had signed a new gas supply agreement with Rio Tinto, under which STO will supply up to 15 PJs of natural gas to Rio Tinto starting from late 2021.

Final Investment Decision on the Barossa Gas Project: The company has announced that a final investment decision has been confirmed to proceed with the US$3.6 billion on the Barossa gas and condensate project.

FY20 Results Update: During the year, the company reported a revenue of US$3,387 million, impacted by lower oil prices and the COVID-19 pandemic. It reported a net loss of US$357 million during the period. The underlying profit was at US$287 million during the period. It ended the period with a cash position of US$1,319 million as of 31 December 2020. With a decent balance sheet, the management declared a dividend of 5 US cents per share.

FY20 Financial Performance (Source: Company Reports)

Outlook: The company will continue to invest in the exploration and development of new domestic gas supplies. The Barossa FID has also paved the way for the $600 million life extension of Darwin LNG for the next 20 years. Moreover, the company is targeting a free cash flow breakeven oil price around the same level as 2020.

Key Risks: The company is exposed to prudent regulatory overview as its operations have a direct impact on the environment and the interests of the local people.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (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: The company has been assigned a BBB credit rating with a stable outlook from Fitch Ratings on 19 April 2021. The stock of STO is trading above its average 52-weeks’ levels of $3.820-$7.800. The stock of STO gave a positive return of ~33.97% in the past six months and a negative return of ~1.13% in the past one week. On a technical analysis front, the stock of STO has a support level of ~$6.76 and a resistance level of ~$7.224. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe the company can trade at a slight discount to its peer average EV/Sales (NTM Trading multiple), considering the decline in top-line and the negative profitability. For the purpose, we have taken peers such as Woodside Petroleum Limited (ASX: WPL), Oil Search Limited (ASX: OSH), Beach Energy Limited (ASX: BPT), to name a few. Considering the expected upside in valuation and current trading levels, confirmation of FID on the Barossa Gas Project and assignment of a stable credit rating, we recommend a ‘Hold’ rating on the stock at the current market price of $6.940, down by 1.140% as on April 21, 2021.

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

New Hope Corporation Limited

NHC Details

Business Update: New Hope Corporation Limited (ASX: NHC) is engaged in the exploration and extraction of coal, oil and gas. The market capitalisation of the company as on 21 April 2021 stood at ~$1.06 billion. As per a recent update, Credit Suisse Holdings (Australia) Limited has ceased to be a substantial shareholder of the company effective 30 March 2021.

Proceedings Against the Company: The company has confirmed that it has been served with proceedings in reference to the announcement dated 23 March 2021, and intends to vigorously defend it.

Issue of Draft Determination by ACCC: On 26 March 2021, the company has announced that the ACCC has issued a draft determination. It proposes to grant authorisation for Bridgeport (Cooper Basin) Pty Ltd, a wholly-owned subsidiary of New Hope Corporation Limited, Vintage Energy Ltd and Metgasco Ltd, in order to enter into joint marketing arrangements of the Vali gas field. The said authorisation is supposed to enable the parties to jointly market gas produced from the Vali field for five years.

H1FY21 Results Update: During the period, the company reported a revenue of $405.5 million and the EBITDA stood at $81.2 million. The total number of tonnes sold stood at 4.9 million during the period. The management declared an interim dividend of 4.0 cents per share in H1FY21.  The cash position during the period end was $215 million.

H1FY21 Financial Performance (Source: Company Reports)

Outlook: The company seems to be set for a decent second half of FY21 with a continued performance at Bengalla. It anticipates strong demand from the Asian markets with the stabilisation in the prices of coal in the short and long term.

Key Risks: The nature of the company's line of business exposes it to risks of accidents and has the potential to disrupt operations, as well as the lives of the employees.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (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: The company reported a reduction in net debt of the company to $265 million in H1FY21, compared to the previous corresponding period. The stock of NHC is trading below its average 52-weeks’ levels of $1.050-$1.595. The stock of NHC gave a positive return of ~9.60% in the past six months and a negative return of ~8.72% in the past one week. On a technical analysis front, the stock of NHC has a support level of ~$1.041 and a resistance level of ~$1.42. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe the company can trade at a slight premium to its peer average EV/Sales (NTM Trading multiple), considering the expected demand from the Asian markets in the near term. For the purpose, we have taken peers such as Coronado Global Resources Inc (ASX: CRN), Whitehaven Coal Limited (ASX: WHC), Yancoal Australia Limited (ASX: YAL), to name a few. Considering the expected upside in valuation and current trading levels, issue of draft determination by ACCC, better than expected performance in a difficult time of operation and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $1.245, down by 2.353% as on April 21, 2021.

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

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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