Morningstar.... Santos Limited (STO) Update: 2Q Production and...

Morningstar....

Santos Limited (STO) Update:

2Q Production and Pricing Drive No-Moat Santos' Debt Lower.
FVE Increased to AUD 6.50
Recommendation: Hold
Change: No Change

We increase our Santos fair value estimate by 3% to AUD 6.50 per share from AUD 6.30, with higher near-term energy prices and the time value of money partially offset by lower-than-expected noncore Asia asset sale proceeds. While our midcycle Brent crude price forecast is unchanged at USD 60 per barrel (2021 real), our forecast average for the four years to calendar 2021 is increased by 10% to USD 70.80 per barrel. At AUD 6.05, no-moat Santos shares remain undervalued, and we think the market is insufficiently pricing for LNG project worth. And this is before potential for incremental gains via debottlenecking and simply growing share of equity gas feed.

The PNG LNG project is a case in point with capacity having crept to 8.3Mtpa from less than 7.0 Mtpa in 2014. But Gladstone LNG and Darwin LNG are also potential contenders for capital-efficient expansion, and for Santos to provide a growing proportion of their gas feed. The Barossa gas project has progressed to front-end-engineering-and-design phase with a final investment decision slated for end 2019. Santo' 25% equity stake is double its 11.5% Darwin LNG stake, where the gas is likely to call home, just 300km away. Santos can monetise resource positions like Barossa early via partial sell-down, or leverage them to earn increased equity stakes in existing infrastructure.

Sell-down of the noncore Asia portfolio for USD 221 million, and Denison Trough assets for up to AUD 43 million, somewhat understated their combined value per our modelling, though with proceeds to be appropriately put to debt reduction. Group net debt stood at USD 2.4 billion at end June, before sale proceeds, and already creditably down on the USD 2.8 billion net debt figure from six months prior. Current net debt/EBITDA of 1.6 is eminently manageable and Santos' net debt target of AUD 2.0 billion by 2019 is within easy reach. Our modelling suggests the target could be all but met by end 2018, with accompanying net debt/EBITDA just 1.3.