We increase our fair value estimate for no-moat Santos by 12% to...

We increase our fair value estimate for no-moat Santos by 12% to AUD 7.85 per share. The company has set out the path by which it intends to grow group production by 40 million barrels of oil equivalent, or mmboe, or around 65% to over 100 mmboe by 2025. This includes base additive Quadrant production of around 19 mmboe, still subject to regulatory approval but unlikely to run into road-blocks in our opinion. The USD 2.15 billion Quadrant acquisition was already factored into our fair value estimate, though we'd assumed depletion would leave group production at a midcycle 80 mmboe or one third above current production levels, all else equal.
At its annual investor day this week, Santos pointed to the growth being achieved substantially from its existing portfolio including Quadrant. Consequently, we increase our midcycle production forecast to around 90 mmboe, still short of the targeted 100 mmboe, but 13% above our prior 80 mmboe forecast. In addition to growth in capacity at PNG LNG, some of which we'd already assumed, Santos points to a tie-back of Barossa gas to more than double its equity share of Darwin LNG production to 9.0 mmboe, development of the Dorado oil prospect which comes with Quadrant but is not included in base production, and from increments elsewhere across Santos' existing production portfolio. The latter includes the Cooper Basin, where well costs are down 50% since 2015, and Queensland's world-class coal seams where drilling activity is increased to 300 wells in 2018 with a fourth rig added, among others.
We now include the growth from Barossa, slow our assumed rate of depletion across Santos' existing onshore gas assets, and credit 5% capacity creep to 8.4 million tonnes per year at Gladstone LNG by 2023. However, we still don't yet factor-in Dorado's oil, and we still credit just one additional 3.7Mtpa PNG LNG train, rather than partner Oil Search's more aggressive 8.0 Mtpa expansion aspirations via three new 2.7 Mtpa trains.