Ann: Santos 2018 Investor Day, page-9

New MS sp target ...$8.30

Gallagher's Action Plan: Going
for It

We attended the annual Santos investor day – a plan to build production of 100mm boe by 2025 was outlined. This looks achievable and we think the market will focus on the deleveraging opportunity over the next 12 months. A further re-rating is likely should oil prices stay near current levels.

WHAT'SCHANGED
From: A$7
To Price Target: A$8.30

We highlight key observations and thoughts from the strategy day:
Drilling intensity and capex increases are likely at GLNG over the next few years.
However, it's also possible that production rises above 6mpta too. Conviction
around our Cooper Basin 2C resource conversion is increasing (we have
previously assumed c. 30% increase in 2P reserves). We think it's likely that
consensus valuations for this asset will increase over time. Inside this report we
include comments by asset from the Strategy Day.

We think the market is likely to focus on Santos's deleveraging profile given
strong underlying energy themes:
Our Beach Energy thesis was that the market would ignore low DCF-based valuations and re-rate the stock given low
EV/EBITDA and free cash yield trading multiples. A similar concept is likely to
develop at Santos should commodity prices stay strong. Santos isn't expensive on pro forma EV/EBITDA metrics (c.5.9x for 2019e), and the recent Quadrant deal lowers free cash breakeven and arguably makes the business more defensive. We examine Santos + Quadrant at a range of oil price forecasts.

We remain Overweight:
Our published forecasts don't include Quadrant Energy but our pro forma analysis does. We move to a probability-weighted price target:
bull (45% weight, scenario value raised 25%), base (50%,value unchanged), and
bear case (5%,value raised 40%).

We think the market is likely to focus on EV/EBITDA multiples, given uncertainty
on DCF valuations for some turnaround and growth assets. Our price target
approximates 6.5x our 2019 pro forma EBITDA estimate for Santos and Quadrant
using 2019e net debt position. Santos has made a well-timed acquisition. Capex will start to increase and E&Ps don't always perform in this environment. However, Santos has articulated its growth plans well, and over time we expect
these to be incorporated in consensus valuations.

Price Target A$8.30
DCF valuation, probability-weighted: 45% bull, 50% base, and 5% bear
case.

Bull A$10
DCF Approximates Brent = basecase + US$10/bbl: Dorado valued at US$6/bbl.
Cooper 2C valued at US$2.0/GJ. US$500m for exploration.

Base A$7
DCF Approximates one-year forward DCF of Brent = US$77/bbl in 2018, US$74/bbl
in 2019, and US$70/bbl in longterm: A$/US$ exchange rate of 0.7. Static assets and exploration have some value.

Bear A$5.60
DCF Approximates Brent = basecase- US$10/bbl: Same as base case for exploration and discovered resource value.