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Macquarie Equities Research
The Global Oil & Gas Specialist
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Stock: STO AU Name: Santos Price: A$13.33 (At 05:10, 26 March 2014 GMT) Recommendation: Outperform 12mth price target: A$17.00 12-month TSR: 30.3% Market Cap (m): A$12,961 Market Cap (m): US$11,855 Current valuation (DCF): A$19.59 ? Event · GLNG has signed its fourth third-party gas contract, this time with the Meridian JV. ? Impact · A 20-year deal, but for an unspecified volume: GLNG will take 100% of the output from the Meridian gas fields (currently 12TJ/d which is equivalent to 1% of GLNG's gas requirements) although the operator (Westside Corporation) expects production to ramp up to 30-40TJ/d (with added compression) from 2017. o we expect between 200-280PJs to be delivered over the 20-year contract o this takes overall GLNG reserves, resources and third-party volumes to ~8,200PJs (with potential for a further 92PJs from the ORG put) - this compares to estimated contractual requirements of ~8,350PJs, suggesting further third-party deals remain likely. · Price looks low to account for volume uncertainty: The contract's volume uncertainties are seemingly reflected in a low price. Specifically, Westside talks of revenue over A$1bn which, although oil-linked, points to a pricing range of between ~A$5.5/GJ (in real terms) which is likely to be competitive versus other sources of local supply. · Corporate acquisition may have been cheaper: Westside is under hostile takeover by Landbridge Group (at an offer EV of just ~A$133m) which implies an EV/2P multiple of merely ~A$0.39/GJ (or A$0.18/GJ on a 3P basis). Adding estimated opex and capex of ~A$2/GJ and A$1.8/GJ respectively (based on A$1.5m well costs, EURs of ~1PJ and A$80m gross for additional compression) to Landbridge's offer points to full-cycle costs of ~A$4.2/GJ. This looks like a potentially cheaper option relative to the gas price price being paid while also giving GLNG control of supply volumes and offering exposure to the significant 3P reserves upside. ? Action and recommendation · Maintain Outperform rating and A$17/sh target: Overall, this looks like a opportunistic deal (the GLNG pipeline runs just 100m from the Meridian fields meaning the JV was a natural buyer) that adds much-needed resource. The price looks competitive and certainly cheaper than supply from some of GLNG's inferior acreage which it may displace. That said, even assuming all 2C resource coverts into 2P, GLNG still appears to have a small reserve shortage, meaning at least one more third-party deal remains likely. ? STO AU vs ASX 100, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, March 2014 (all figures in AUD unless noted)
