Traders Versus Holders, page-75

Looks like $7 may be possible by 3rd qtr instead of 4th. Big report out today by MS. 1st broker to slap $7 on STO....


Santos
Gallagher's Action Plan: Back on

We examine trends around two business units that could deliver Santos a A$7+ share price and underpin the board's
decision to reject the Harbour approach. We resume coverage on Santos at Overweight.

WHAT'S CHANGED?
From: N/A
To: Overweight
Price Target: A$7.00

We upgraded Santos in Gallagher's Action Plan in August2016 on a cost-out and drilling efficiency turnaround. Phase I of this strategy has played out. We think cost reductions are nearing trough levels - albeit there could be further minor improvements. The second phase will be more difficult. Phase II involves using Santos's "new" cost structure and drilling efficiency to capitalise on Santos's
significant 2C resource position (and prospective resource potential) and turn
these into reserves and ultimately value.

Cooper Basin trends look very encouraging. We have now seen two years of Beach Energy Cooper Basin JV gas upgrades in acreage with Santos. We expect Santos to follow and examine reserve and resource trends over the past 5 years. We lift our Cooper Basin production forecasts. Oil production may also stabilise
after many years of decline. We lift our Cooper Basin valuation to incorporate a
larger reserve position to account for expected 2C to 2P reserve conversion over
the next few years. Santos stopped reporting its 2C resource position in 2014. We expect this to resume and Santos to focus on how this position may translate to
reserves over the next few years.

Can Santos lift the GLNG plant above 6mtpa and exceed guidance? GLNG
represents approximately 50% of our valuation for Santos. In our view, if the
board was concerned about the outlook for this asset, it would have recommended a shareholder vote on the Harbour offer. Our detailed modeling suggests GLNG can build above 6mpta and exceed guidance if Roma West exceeds 100 TJ/d and other fields build to recent projections - Roma West is
currently producing over 70 TJ/d and growing by 5-10 TJ/d per quarter. We
outline field production forecasts (Morgan Stanley estimates) across Fairview,
Arcadia, Scotia and Roma East. The investor day on September 26 will be a key
catalyst for the company.Lifting GLNG to 6.5mtpa would increase our DCF by c.
A$0.3/share, lifting to 7mpta would increase by c. A$0.6/share. We maintain our valuation for GLNG based on a 6mpta project.

Bull: $8.00 DCF
Approximates Brent = basecase + US$10/bbl: We do not make any other
changes from the base case.

Base: $7.00 DCF
Approximates 1year forward DCF of Brent = US$77/bbl in 2018, US$74/bbl in
2019 and US$70/bbl longterm: A$/US$ exchange rate of 0.7. Static assets and
exploration have some value.

Bear: $4.00 DCF
Approximates Brent = base-case- US$10/bbl: Very little value for exploration
or discovered resources.