Santos (STO) - Much value on offer

Santos is an oil and gas producer with operations across Australia, Papua New Guinea, Timor-Leste and North America.

First-half CY24 underlying net profit after tax (NPAT) from Santos of US$654 million ($970 million) matched market expectations, although it fell short of Ord Minnett forecasts, due largely to some non-recurring operational costs from weather events.

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The unfranked interim dividend of US$0.13 per share was inline with consensus forecasts, while Santos left CY24 guidance unchanged. Thesharp slide in Santos shares post the result appears, in our view, to have beendriven by an apparent downgrade to the company’s medium-term free cash flow(FCF) forecasts – the company now expects US$4.7 billion of FCF in CY29, versusa prior forecast of US$5.1 billion in CY28.

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Santos CEO Kevin Gallagher appears resolute on keeping atighter rein on growth expenditure, with projects having to offer up better returns than incremental expansion or share buybacks. Gallagher also noted the various projects would not be developed on the same timeline and its ownership stakes would be partially sold down.

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An estimated FCF yield of 20% once Pikka and Barossa LNG start producing, and rigorous control of how that extra cash is spent, implies to us that Santos will have plenty of room to return excess capital to shareholders either via an increased payout ratio or share buybacks. In our view, the medium-term prospects for Santos offer a compelling investment opportunity, leading us to raise our recommendation to Buy from Accumulate, while we maintain our target price of $8.50.

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