STO, SANTOS LIMITED

[nipper]

In Reply To: wolverine's post @ May 24 2013, 09:32 PM

- GLNG progressing comfortably
- Train modules due to arrive
- Cooper gas provides backstop
- Brokers see STO discount to OSH, WPL as unwarranted


By Greg Peel

When Santos' (STO) massive Gladstone Liquefied Natural Gas (GLNG) project is up and running, the company should enjoy after tax cashflow of US$1.2bn for its stake, on Macquarie's current forecasts. That's equivalent about 70% of Santos' 2012 cashflow. In other words, GLNG is a very significant project.

With such significance has come significant risk. The construction and ramp-up of LNG production facilities represent long-term, high-cost projects. Adding an additional element of risk is GLNG's source gas, coal seam methane. Santos is not the only company developing CSM LNG facilities in Queensland, but CSM projects are new to Australia. Both Santos' legacy Cooper Basin and the various LNG projects in Western Australia source conventional natural gas.

Thereafter, major risks have included cost blow-outs and a lack of gas reserves to provide sufficient flow for the planned LNG train(s). All resource sector projects in Australia, and around the globe, have suffered from serious cost over-runs from initial guidance these last couple of years, threatening the viability of projects that were approved at the final investment decision (FID) basis. Gas reserves are a matter of estimate, particularly at the planning stage, not fact.

Risks, costs and reserves have all added up to a healthy dose of scepticism among energy analysts and investors. More than one analyst to date has dismissed GLNG, and CSM LNG in general, as not able to be viable. Alongside GLNG there are two other major CSM LNG projects underway: BG's Asia Pacific (APLNG) and Arrow Energy's Queensland Curtis (QCLNG), both of which will source gas from the same region, and both of which are progressing towards commissioning. All three projects have suffered from serious cost blow-outs to date, as have the many WA offshore natural gas projects. It is notable that while these massive projects press on, Australia's big diversified miners and Santos' larger LNG rival Woodside Petroleum (WPL) have shelved high-cost projects in an uncertain commodity climate.

Santos' existence does not depend on GLNG. The company's Cooper Basin operations, among other operations and developments, still provide value within the company's base valuation, as does Santos' share in Oil Search's (OSH) bigger and more advanced PNG LNG project. GLNG then becomes something of a binary value-add. If Santos can pull it off, huge value is added on a share price basis, as the cashflow number above suggests. If not, then an awful lot of money has been wasted and the share price impact would be notable. Scepticism has meant the market is already ascribing low potential to GLNG success. But as each month passes, and each milestone is achieved, that potential is rising.

Last week Santos conducted a site tour at Gladstone. Not only is the progress of construction of the LNG facility itself, being conducted by contractor Bechtel, fundamental, so too is supporting infrastructure such as the material offload facility (MOF) and gas delivery pipelines. In the latter case, a pipeline tunnel has to be built from the mainland to the Curtis Island plant, just to add to complications. On the other side of the coin, the progress of drilling for CSM and the flow-rates being achieved at established wells is critical to gas supply. Analysts were keen to assess just how all this is progressing.

[wolverine]

from Citi

GLNG progressing well, likely to beat market expectations

GLNG schedule looking good, 1st LNG 1Q15 likely — The critical path tunnel crossing
is making good progress, and we think 1st LNG is targeted for early-15, ahead of STO
guidance (2015) and Citi est. (mid-15). GLNG remains on budget at US$18.5bn
(assuming 0.87US$/A$) or A$20.5b assuming parity FX. 50% of the US$2b contingency,
has been spent which is inline with expectations given the project is >50% complete.
These outcomes are far better than investor's typically low expectations for GLNG.

Drilling making good progress, wells under budget and performing strongly —
GLNG spudded a record 27 wells in April, and should comfortably drill targeted >200
wells in CY13. Average Roma & Fairview well costs were down a further 14% & 19%
respectively in 1Q13, and STO targets a further 50% reduction from current levels.
Fairview average well capacity now 1.58TJ/d from 169 connected wells, vs planning
assumptions of 1.1TJ/d. STO is very confident in Roma flow rates delivering in excess
of STO's planning assumption of 0.5TJ/d, and starting dewatering ahead of schedule.
 Pipeline interconnectivity to mitigate schedule risk — GLNG pipeline is planned to
connect to BG pipeline on the mainland, as well as a 600TJ/d gas interconnector on
Curtis Island, with long lead items ordered. Connection will enable GLNG to feed rampup
gas into BG’s project, and also mitigate schedule risk for GLNG commissioning.

GLNG gas shortage not a problem for STO, an opportunity — GLNG is ~50TJ/d
short of gas for its long term 7.2mtpa contractual requirement. We expect to see further
gas supply agreements, likely with APLNG, both to accelerate GLNG T2 ramp-up and
also to fill ullage. This opportunity would allow STO to beat conservative guidance for
ramp-up. STO's gas portfolio is also well positioned, with uncontracted Cooper and
Kipper volumes to benefit from gas shortages created by GLNG.

Project discount unwarranted, STO remains our top pick — We remain
comfortable that GLNG is likely to deliver inline or ahead of schedule, and broadly
inline with current budget. We currently model 1st LNG in mid-15, but Jan-15 would
add A$126m to NPAT in CY15 or ~16%, placing STO on a CY15 PE of 14.2x, and
CY15 EV/EBITDAX of 3.8x, attractive compared to OSH at 4.4x and WPL at 5.7x. The
metrics are even more attractive once T2 is ramped up. STO's deep discounted rating
i s unwarranted in our view compared to OSH and WPL. STO remains our Top Pick.

[wolverine]

from MS


Santos: AGM confirms project delivery, expect higher DPS
Quick Comment: Key to Santos’ share price performance is delivery of growth projects and at the AGM on May 9, Santos confirmed capex and timelines for PNG and Gladstone LNG projects. PNG LNG is now about 80% complete and GLNG is 50% complete according to Santos. Market concerns re progress on GLNG have contributed to share price weakness over the past year. If Santos can execute GLNG on time and budget, then there is the potential for a major re-rating, in our view. Site tours late May should update project status and may result in a re-assessment of GLNG project risk. Other growth appears to be heavily discounted. Santos has oil developments offshore WA and Vietnam which will contribute to oil production over the outlook. Onshore Australia, Santos are moving forward on gas developments and their aspiration is to grow production to about 85 mmboe by 2020, amounting to production CAGR of 6% which is materially higher than our forecast of production of 77 mmboe in 2017. Shale gas exploration is active in the Cooper Basin and while smaller companies in this region are being re-priced in the market, Santos has the added benefit of access to infrastructure. “We want to reward shareholders as earnings increase” is an extract from the incoming Chairman’s address to the AGM. The Board indicates it will review the dividend policy as PNG LNG production is approached in 2014. However, higher DPS is balanced against the need to re-invest for growth, but even so, ours and consensus DPS may be conservative. We retain an Overweight rating. In our view, the primary concern in the market is the potential for further value destruction at GLNG. If this can be addressed then we would expect a re-rating.

[nipper]

Diversified oil and gas major Santos (STO) has made strong progress on development with the partners in the PNG LNG and Gladstone LNG (GLNG) projects. In 2012 the company's total production was 52.2 million barrels of oil equivalent, split between natural gas (69%), oil and condensate (23%), liquefied natural gas and liquefied petroleum gas (8%), and as at 31 December 2012 proved and probable reserves stood at 1,406 million barrels of oil equivalent. The Fletcher Finucane field is expected to come on stream with first oil production mid-year and maintenance in the Cooper Basin has been carried out in preparation for the larger volumes that will flow to GLNG from 2015.

The company's main focus is on delivering the GLNG project in Queensland, in which it is the operator and 30% JV partner. Bustling activity and the latest production numbers have triggered broker reviews, with the result the company has six Buy ratings and two Holds. Risks appear mainly skewed to the upside and no one wants to recommend a Sell on this stock.

UBS marks out GLNG as having upside risk. If the project runs on time for a mid-2015 start, and is on budget (current budget is $20.5bn versus UBS' estimate of $22bn), this would add 43c per share to valuation. The question for UBS is the availability of gas supply, as there has been no update on the building of gas delivery to the project. The broker expects there will be enough to fill the first train but asks how long it will take to fill the second train, and whether third party gas volumes will be required. Suspecting the answer to third party gas volumes is affirmative, this is likely to be sourced from the Fairview field, in UBS' view.

BA-Merrill Lynch notes the PNG LNG is progressing and first cargo flights from the Komo airstrip are expected next month. The broker thinks the market is awaiting further news on supplemental debt on this project but, given Exxon's co-lending decision and the substantial de-risking that has occurred, this should be secured soon. With Komo almost ready for operations, UBS is more confident of first PNG LNG deliveries in 2014. Moreover, the broker expects that progressive ramp-up in production and revenues from the base business and LNG should procure a dividend increase to $1.00/share in 2017. The broker is monitoring the progress of the key pipeline between Kutubu and Hides as this remains the risk to the project being completed on time.

Macquarie views Santos as the cheapest stock in the large cap sector and maintains a Buy rating. The latest production numbers may have been a bit disappointing for the broker but this has been swept aside by the progress on the growth projects. For Deutsche Bank too, while the March quarter production was lower than expected, comfort is drawn from the fact the company maintained FY13 guidance.

JP Morgan notes the production shortfall was mainly to do with the Moomba gas plant, in preparation for a step-up in throughput in 2015. The broker thinks profitability will improve, starting with Fletcher Finucane oil in the second half of this year, PNG LNG in the second half of 2014 and then GLNG in 2015. UBS is of a similar view. Investor caution may weigh for some months but the attraction of future earnings will override this at some stage. This should, according to UBS, start to happen by the end of the year.

Citi rates Santos an attractive Buy proposition based on the PNG LNG and GLNG growth, and margins from higher domestic gas prices at the Cooper Basin legacy asset. Notwithstanding oil price fluctuations, BA-Merrill Lynch anticipates risks skewed to the upside too. Despite political issues with CSG, particularly in NSW, the broker believes Santos can rest its case on Queensland, where projects are being built and gas is starting to flow. Credit Suisse is the main outlier, downgrading from Buy to a Hold rating. The main reason is the broker finds the shares have outperformed large cap mining peers so there's not yet a compelling valuation case. The other Hold rating is CIMB.

Curbing enthusiasm somewhat is the fact that LNG execution risk is high. Investors are expected to remain cautious in the construction phase, given the large capex increases in both the GLNG and PNG LNG last year. UBS notes Santos is investing $4 billion in 2013, the peak investment year, and over 80% of this is going into LNG development and future LNG supply projects. Nevertheless, cost over-runs are highly likely in UBS' view. UBS expects spot gas prices on the east coast to rise to over $10/GJ in 2016 and Santos stands as the major beneficiary with its large portfolio in Cooper Basin (unconventional) and Gunnedah Basin (CSG).

Looking closely at Santos' strategic positioning in the Browse Basin, Western Australia, makes Citi think that the company has been sharp. It farmed down a 20% equity stake in WA-274-P to Inpex in 2006 and farmed in with Total in the adjacent block. Inpex and Total are foundation partners in the Ichthys LNG project. The project's pipeline to Darwin has spare capacity for a third LNG train and additional exploration and appraisal success could see Santos positioned to participate in this train. Citi, having modelled this scenario, estimates Santos' 30% share of WA-274-P could be worth $1.68 a share un-risked.

Price targets range from a low of $13.25, held by Credit Suisse, to a high of $17.30, held by Citi. The consensus target is $15.36, suggesting 30.4% upside to the latest share price. Santos offers a dividend yield of 2.5% based on the consensus FY13 earnings estimates and 2.6% based on FY14.

[wolverine]

$13 today and I'd hope a good chance of having a crack at or just under $14 from here before it needs to do some work again.

[mistagear]

In Reply To: nipper's post @ Feb 25 2013, 10:30 AM

buy dips...ehh

[nipper]

In Reply To: wolverine's post @ Feb 25 2013, 10:19 AM

probably related to this:

BEACH FARM-OUT OF EXPLORATION ACREAGE IN NAPPAMERRI TROUGH TO CHEVRON

Beach will transfer up to 60% of its interests in PEL 218 (Beach 100%) and ATP 855 (Beach 60%) to Chevron. It is envisaged that Beach will potentially receive US$349 million over two stages for both permits over several years.

[wolverine]

In Reply To: wolverine's post @ Feb 22 2013, 10:17 AM

Whipsaw!

Whipsaw!!

[wolverine]

from MS

Santos reported a material increase in FY2012 underlying profit to A$606m, in line with ours and consensus estimates of A$605m. Final dividend was maintained at 15cps for a full-year payout of 30c. The statutory result was A$519m and includes asset impairments of A$77m, mostly related to gas assets in Bangladesh. Production guidance for 2013 was unchanged in the 53-56 mboe range. MS estimate is 53.9 mboe. Reserves rose 3% from 1.36 mboe to 1.41 mboe, with Cooper basin gas reserves notable at +7%. Reserves for GLNG, including third party agreements, rose 12% to 6,721 PJ (gross) but are still well short of the +/- 10,000 PJ that the two LNG trains will require over a 20-year operating life. Capex guidance was re-iterated at A$4b for 2013. Estimates for GLNG and PNG LNG capex and start-up were unchanged. These projects were 43% and 75% complete at year-end and, according to Santos, are on schedule for LNG production in 2015 and 2014, respectively. Liquidity appears adequate at A$5.8b, comprising A$2.2b of cash at year-end, and A$3.6b of undrawn credit facilities. Net debt at year-end was A$1,553m. We believe the market is discounting delivery of GLNG and PNG LNG against stated objectives. If Santos can deliver these projects on time and within budget then a re-rating is justified, in our view. We retain an Overweight recommendation on the stock.