Santos Ltd (ASX: STO) this week reported what broker UBS described as a “strong” first-half result, beating market expectations in a period the company is describing as a transition year.
Profit down but stronger second half expected
The oil and gas major reported first-half revenue of US$2620 million, up 2% on the same period the previous year, and net profit of US$355 million, down 19%.
Santos Managing Director Kevin Gallagher said the company was entering the second half in a stronger position.
He added:
The first half marked an important step forward for Santos. We brought the Pikka project online safely and continued to progress Barossa through commissioning towards steady-state production, while the base business continued to perform strongly. Pikka achieved first oil in May, moved to continuous production in June and we lifted our first crude oil cargo last week. Production is expected to build towards the 80,000 bbl/d gross plateau late in the third quarter, and our drilling program is consistently beating technical limits, reducing the time and cost to drill a well. Barossa is safely progressing through commissioning to steady state production, with current production around 550 mmscf/d and planned to increase further to around 600 mmscf/d by end of the quarter. At steady state production the current cargo cadence is one approximately every eight days, while Darwin LNG delivered 100 per cent plant reliability in the first half.
Mr Gallagher said with the major development of Barossa and Pikka complete, the company was expecting second-half production to be 20% to 30% higher than the first half, “supporting stronger free cash flow and returns for shareholders”.
Mr Gallagher said the Papua LNG project would be a focus in the second half and was on track for a final investment decision in the fourth quarter of 2026.
He added:
Project financing continues to progress well, with at least 60 per cent targeted to be funded through project financing facilities. Strong performance from the base business and continued capital discipline are funding investment in the next generation of low-cost, high-margin production growth opportunities in our deep portfolio.
Santos shares a buy, but looking fully valued
UBS said in a note to clients following Santos’ financial report that the company’s strong dividend of US11.6 cents stood out, indicating the board had confidence in the second-half outlook.
They said the company was well-leveraged to higher oil prices.
They added:
STO has 80% of its LNG sales indexed to oil and/or Japan/Korea Marker on an approx 3 month lag, and so the spike in oil & LNG prices arising from the Middle East conflict carries stronger cashflows though to at least ~Nov-26. We expect STO will qualify for its new higher div payout (lifting from 40% of FCF ex growth to >60% of all-in FCF) when Pikka and Barossa reach plateau production, expected within the next 40 days turning on stronger cash returns from the Feb-27 result onwards.
UBS has a buy rating on Santos shares with a price target of $8.30, compared to $8.31 currently.
