COMPANY NEWS & UPDATES
Santos Limited ( STO )
Accumulate Valuation $ 10.20
Earnings Forecast
Yr to Dec |
2021A |
2022F |
2023F |
|
Sales Revenue
($ M )
|
6,355 |
12,749 |
13,051 |
|
Reported
Profit ($ M )
|
1,275.6 3,587.4 |
3,597.7 |
EPS ( c ) |
59.7 |
105.9 |
106.2 |
Div ( c ) |
19.3 |
27.6 |
29.5 |
P / E ( x ) |
11.5 |
7.5 |
7.4 |
Yield (%) |
2.8 |
3.5 |
3.7 |
Franking (%) |
80.0 |
70.0 |
70.0 |
|
EPS Growth
(%)
|
192.4 |
77.5 |
0.3 |
* Profit & EPS adjusted for options , goodwill , notional earnings and nonrecurring items .
Upgrade in Near Term Earnings
Russia ' s invasion of Ukraine has launched energy prices , and in particular natural gas . Santos ' earnings can be expected to climb materially due to rises in all energy commodity prices including crudereferenced LNG contracts , but in particular due to its ability to sell a portion of LNG as spot cargoes , outside of contracts . On an energy equivalent basis , approximately 41mmboe or 40 % of Santos ' 104mmboe of hydrocarbon sales in 2021 comprised LNG , and around 16 % of Santos ' LNG cargoes were sold on the basis of spot in 2021 .
We estimate LNG will increase to 44 % of Santos ' total sales in 2022 given the merger with LNG-heavy Oil Search in late 2021 , partially countered by equity sell-down of Darwin LNG interests . We expect LNG to increase to near 50 % of total sales by 2024 assuming growth in Gladstone LNG sales to near capacity . But Santos remains Australia ' s second-most LNGleveraged company , behind Woodside , and the second-most exposed to spot or gas hub pricing , in a very small field .
Santos doesn ' t provide guidance on the anticipated ratio of spot LNG sales to contract sales . But we project the recent historical ratios which for both Santos and Oil Search have averaged , around 15 % of LNG sales into spot , to persist .
We increase our 2022 and 2023 EPS forecasts by 41 % and 36 % to USD 0.75 ($ 1.06 ) and USD 0.71 ($ 1.06 ), respectively . These equate to respective P / Es of 7 at Santos ' current share price . Our 2022 and 2023 DPS forecasts increase by 42 % and 37 % to USD 0.20 ($ 0.28 ) and USD 0.20 ($ 0.30 ), respectively . These equate to respective fully franked yields of 3.6 % and 3.9 % at current share prices . Though this assumes maintenance of the current comparatively low sub-30 % payout ratio . Our unchanged $ 10.20 valuation is more than 30 % above the current share price .
Our expectations for Santos ' average price achievement across all commodities in 2022 and 2023 increase by 27 % and 23 % to USD70 / boe and USD64 / boe , respectively . While extremely high , spot LNG prices affect a minority circa 7 % -8% of Santos ' hydrocarbon mix overall . These spot prices are regardless 142 % and 94 % ahead of the 2020 average of USD 33 / boe .
However , we expect prices to normalise rapidly after 2023 and our valuation is unchanged . An increase in the AUD / USD valuation conversion rate to 0.75 from 0.72 prior counters the benefit of higher near-term energy commodity prices . Operating cost inflation generally accompanies higher pricing . Anticipated annual net operating cash flows of around USD 3.6 billion in 2022 and 2033 for the merged Santos / Oil Search should strengthen the balance sheet , alleviate capital expenditure pressures and perhaps reduce the need to farm-out projects or to lock-in as much future LNG offtake . Strong anticipated cash flows also open the potential for a higher payout ratio , or capital management such as buybacks , and / or special dividends .
Our valuation equates to a nononerous 2031 EV / EBITDA of 7.9 , excluding the USD 2.7 billion lump sum we credit for other PNG gas resources and Alaska North Slope . Our assumptions support a healthy 7.0 % 10-year EPS CAGR for the merged entity to USD 0.75 ($ 1.16 ) by 2031 . We credit 10-year EBITDA CAGR of 7.9 % to USD 5.7 billion by 2031 . Elevated EBITDA forecasts for 2022 and 2023 are expected to normalize given our expectation for pull back in energy prices to our unchanged USD 60 per barrel midcycle Brent assumption from current elevated USD 100 plus levels . But this is still sufficient to underpin the healthy EPS growth rate , including PNG LNG expansion , Barossa tie-back to Darwin and Dorado oil developments .
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