Investment Thesis:
- Currently undertaking a review, with management highlighting on the conference call: “this year it will seek to further optimize the portfolio, reducing gearing and future CapEx, and conduct a review of the capital management framework including returns to shareholders. This will ensure one is in the best position to provide returns for shareholders, reduce debt, invest in growth and invest in the energy transition”.
- Leveraged to the oil price.
- High quality assets which offer a number of core assets within its portfolio (no single asset risk).
- On-going focus on cost reduction and positioning of the business for a lower oil price environment.
- Strong balance sheet position.
- High quality management team who are able to operate assets and extract synergistic value from the recent merger with Oil Search.
Key Risks:
- Supply and demand imbalance in global oil/gas markets.
- Lower oil / LNG prices.
- Not meeting cost-out targets (e.g., reducing breakeven oil cash price).
- Production disruptions (not meeting GLNG ramp up targets).
- Strategic investors sell down their stake or block any potential M&A activity.
Key Highlights:
- Relative to the pcp: Production was up +3% to 92.1mmboe. Sales volume of 107.1mmboe, down -3%.
- Product sales revenue of US$4.71bn, up +39%.
- EBITDAX (earnings before interest, tax, depreciation, depletion, exploration, evaluation and impairment) of US$2.81bn, up +48%.
- Record free cash flow of US$1.5bn and underlying profit of US$946m, driven by higher oil and LNG prices vs pcp due to a recovery in global energy demand and supply constraints across the industry due to lower capital investment through the pandemic.
- STO was able to deliver a free cash flow breakeven of US$21 per barrel in 2021.
- Reported NPAT of US$658m includes losses on commodity hedging and costs associated with acquisitions and one-off tax adjustments and is significantly higher relative to the pcp due to impairments included in FY20.
- The Board declared a final dividend of US8.5 cents per share (franked 70%), up +70% relative to the pcp. This equates to 20% of full-year pro forma free cash flow for the merged entity less dividends paid in the first half by both companies and is in-line with STO’s sustainable dividend policy which targets a range of 10% to 30% payout of free cash flow. Management noted STO does not expect to generate franking credits for the next several years.
Company Description:
Santos Limited (STO) explores for and produces natural gas, liquefied natural gas, crude oil, condensate, naphtha and liquid petroleum gas. STO conducts major onshore and offshore petroleum exploration and production activities in Australia, Papua New Guinea, Indonesia, Vietnam. The company also transports crude oil by pipeline.
(Source: Banyantree)
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