Santos Limited (STO) – September quarter production update

Santos Limited explores, develops, produces, transports, and markets hydrocarbons in Australia and Papua New Guinea. The company’s assets are located in Alaska, Cooper Basin, Queensland and New South Wales, Papua New Guinea, Northern Australia, Timor-Leste and Western Australia. It also engages in the development of decarbonization technologies. In addition, the company produces crude oil, liquefied petroleum gas, ethane, liquefied natural gas, and condensate, as well as natural gas. Santos Limited was incorporated in 1954 and is headquartered in Adelaide, Australia.

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Santos (STO) delivered a solid September quarter result. Production reached 26.3 million barrels of oil equivalent (mmboe) for the quarter and sales revenue was US$2.0 billion. Both were in-line with consensus estimates. Year-to-date production of 71.9 mmboe is up 10% on the previous corresponding period (pcp). The average realised LNG price increased to US$16.22 per million British thermal units (mmBtu) up 44.7% on the June quarter and up 46.8% on the pcp. The average realised domestic gas price was US$6.61 per gigajoule, up 19.1% on the June quarter and 12.2% higher than the pcp. The quarterly figures reinforced the shift to cash generation now that several major growth projects have moved into production. STO reported free cash flow of US$957 million for quarter, which leads us to increase our FY26 dividend forecast by 9%.

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Full-year production guidance was narrowed to 99–102 mmboe from 99–105 mmboe due to seawater treatment plant delays, pipeline disruptions and adverse weather affecting the Pikka oil project. However, consensus was already towards the low-end, at 100 mmboe. On growth, STO's two major growth projects have now been effectively delivered - Pikka oil and Barossa which has reached nameplate production. The next phase of growth includes the Agogo production facility tie-in project which is underway and a final investment decision on Papua LNG which could come in the next few weeks. Other longer-term growth options include the Beetaloo Basin and Alaska expansion opportunities. We increase our EPS estimates by 2.4% and 0.5% in FY26 and FY27 following the quarterly update. The near-term earnings upgrades are partially offset an increase in our risk-free rate assumption to 5.0% (from 4.5%), leaving our target price modestly higher at $8.40 from $8.20 previously.

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We maintain a Hold recommendation.

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