Santos Limited

STO Details

Project Approval from Federal Minister: Santos Limited (ASX: STO) is engaged in the exploration of gas and petroleum. The market capitalisation of the company stood at $13.24 billion as on 25^th November 2020. Recently, the company notified the market that it has received approval for Narrabri Gas Project from Federal Environment Minister Sussan Ley. STO will now embark on a 12-18-month appraisal program ahead of a Final Investment Decision (FID) for the next phase of project development.

Secured New Debt Facility: The company has secured a new US$750 million syndicated bank loan facility, which was oversubscribed around 3x and received strong support from a mix of existing and new relationship banks. The company would use the proceeds from the new facility to refinance the existing US$750 million debt facility, which was established for the acquisition of ConocoPhillips’ northern Australian and Timor-Leste assets.

Debt Maturity Profile (Source: Company Reports)

Operational and Financial Highlights: For the quarter ended 30^th September 2020 (Q3 FY20), the company reported production of 25.1 mmboe, reflecting a rise of 22% over the previous quarter. In addition, the company’s production was higher in all five core assets, mainly due to higher domestic gas and LNG volumes. Sales revenue for the quarter amounted to US$797 million, indicating a growth of 2% on the previous quarter. This showcases the strength of the company’s diversified portfolio of fixed-price domestic gas contracts together with a higher equity level in Bayu-Undan. Also, the company generated a free cash flow of US$143 million, which brought the free cash flow for the nine months to-date (22 October 2020) to US$574 million.

Guidance: For FY20, the company expects lower upstream unit production costs in the range of US$8.25-8.75/boe primarily because of the continued focus on operating efficiencies in the base business. Production for FY20 is expected to be between 83-88 mmboe, and sales volume is likely to be in the ambit of 101-107 mmboe.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: At the end of September 2020, the net debt of the company stood at US$3,677 million and gearing of 33.6%. The stock of STO has provided positive returns of 23.67% and 16.22% in the last one and three months, respectively.  The 52-week low-high range for the stock stands at $2.730 - $9.070, respectively. On a technical analysis front, the stock of STO has a support level of ~$5.405 and a resistance level of ~$7.498. We have valued the stock using the price to earnings multiple based illustrative relative valuation and arrived at a target price with an upside of high single-digit (in percentage terms). For the purpose, we have taken peers such as Woodside Petroleum Ltd (ASX: WPL), Oil Search Ltd (ASX: OSH) and Origin Energy Ltd (ASX: ORG), to name few. Thus, in light of the decent performance in September 2020 quarter, recently received approval for Narrabri Gas Project, and valuation, we give a “Hold” recommendation on the stock at the current market price of $6.530 per share, up by 2.672% on 25^th November 2020.

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

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