By Bruce Williams

Santos is an energy business that has exploration and production operations covering LNG, domestic gas, and oil.

We are positive on the market dynamics for energy for several reasons:

  • Over the next 10 years+ demand for gas will be robust as gas fired electricity generation is required to balance out volatile supply from renewables
  • It is in structural supply deficit due to several years of underinvestment as a result of extremely low commodity pricing in the middle of last decade
  • ESG concerns and government regulation in approving new projects
  • Even though forward volume growth will be impacted by the transition to renewables, we believe that gas will provide the bridge between old and new technologies that allow stability of the entire system

In terms of opportunities for STO in isolation:

  • The recent acquisition of Oil Search provides a strong pipeline of projects that will allow Santos to continue to grow production
  • Non-core projects can be sold at a time when underlying commodity prices are strong, aiding balance sheet strength
  • Santos is committed to being carbon neutral through the development of carbon capture and storage. In fact, they may have the ability to turn this into an additional revenue stream by providing carbon capture and storage to other energy producers
  • It is a highly cash generative business with finite life assets – as the market changes they are able to reposition the business by simply changing the type of investment they replace depleted assets with

As we have seen recently, energy prices have increased dramatically as a result of the Russia / Ukraine conflict coupled with an incoherent domestic energy policy. Santos is not able to fully take advantage of these price changes as a large proportion of their product is sold on long-term contracts. However, they will benefit from product sold at spot prices, and also positive contract roll as contracts expire and are then renewed. Obviously current pricing is not sustainable, as such, we use more conservative pricing when working out what the business is worth.

From a management perspective, we believe they are being reasonably conservative. They are taking the current environment for what it is, which is abnormal. They are choosing which projects to develop based upon a normalized environment, strict return requirements and with the ability to tie into existing infrastructure to control Capex spending.

Given the current share price, we believe Santos is very good value especially given the growth pipeline they have in place. Obviously, execution by management will be critical to positive shareholder returns.

If you would like more information please call 1300 ELSTON or contact us.