Santos (STO) – Underestimated Outlook

Santos produces oil and gas from assets located across Queensland, NSW, Papua New Guinea, Western Australia, Northern Australia, Timor-Leste and the US state of Alaska. Santos was incorporated in 1954 and is headquartered in Adelaide,

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Santos (STO) reported December-quarter production and sales of oil and gas that matched market expectations. The company guided to a fall in unit operating costs and higher output in CY25.

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The expected start of production from the Barossa field, offshore Northern Territory in the Timor Sea, in the September quarter underpins the upgraded production guidance for CY25, and inclusion of Barossa volumes is the primary driver of the guidance for lower unit operating costs. In our view, the broader market is not positive enough on how keen Santos is to boost shareholder returns or its ability to generate strong free cash flow, meaning our dividend yield forecasts are well above consensus estimates.

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We maintain our Buy recommendation and target price of $8.40on Santos. Catalysts include a significant program of cost savings in 2025,management doing a better job ‘selling’ its dividend payout policy to themarket, and the Barossa and Pikka developments coming to fruition.  

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