Morningstar.... Recommendation: Buy Change: No Change We retain...

Morningstar....
Recommendation: Buy Change: No Change
We retain our AUD 5.75 fair value estimate and our longer-term assumptions for no-moat Santos. The firm reported robustly stronger-than-expected first-half 2017 earnings in percentage terms, but from a low base. The recently upgraded company 57-60 mmboe production forecast is maintained, as is cost guidance. We increase our fiscal 2017 and 2018 EPS forecasts by 18% and 6% to AUD 0.28 and AUD 0.27, respectively. We were impressed by the EBITDA margin on non-third-party sales, which rose to over 83% in first-half 2017, the highest level in over 15 years. We retain our midcycle 70% forecast, given a lack of confidence in the sustainability of this performance, but this could prove conservative, should Santos hold this level of returns in the second half.

Underlying first-half 2017 NPAT improved to AUD 207 million from negative AUD 10 million in the prior corresponding period. This is double our forecast but increases the full-year forecast just 18%, given the expected stronger second half. A 28% improvement in Brent prices to USD 55 was key, but costs also featured. On our measure, unit operating costs fell 22% to USD 6.40 per barrel of oil equivalent, which is remarkable, as price-linked costs are considerable in energy production. The underlying result excludes AUD 877 million in largely noncash impairments; when included, these drive a statutory loss of AUD 671 million. But the cash performance is no less for the wear. Net operating and free cash flow rose 144% and 28% to AUD 748 million and AUD 554 million, respectively, double our expectations. Net debt fell 15% from December's AUD 4.3 billion to AUD 3.7 billion, with strong cash flows aided by AUD 196 million in SPP proceeds and AUD 176 million in asset sales.

Nothing speaks louder than cash, and far fewer must now be doubting CEO Kevin Gallagher's delivery on promises. We still don't pencil in reinstatement of dividends until 2018, but if performance continues on this trend, we may be proved too hawkish.