Morningstar | Fourth Successive Year of Underlying Earnings Growth for Santos. No Change to AUD 7.85 FVE.
We make no change to our AUD 7.85 fair value estimate for no-moat Santos. There were no real surprises in the 2018 earnings result. Including a month’s Quadrant earnings for the first time, the company reported underlying 2018 NPAT up 116% to USD 727 million, well ahead of our USD 585 million expectations. However, this includes a USD 146 million favourable foreign exchange gain which if excluded brings the result back to near in line with forecast. Net operating cash flow up 44% to USD 1.60 billion was only marginally ahead of our USD 1.50 billion expectations. The company declared a fully franked USD 6.2 cent second-half dividend bringing the full year to USD 9.7 cents on a modest 28% payout. This was ahead of our USD 7.8 cent target, but the quantum makes the beat somewhat immaterial. The effective yield is just 0.5%.Santos had an excellent year and is in great shape to deliver earnings growth going forward. The company is driving costs lower, despite higher energy prices, in a turnaround that began three years ago. All its assets are free cash flow-positive at less than USD 40 per barrel oil prices and the target for 2019 is a free cash flow breakeven at less than USD 35 per barrel. That’s despite 2019 guidance for USD 1.1 billion in capital expenditure, up sharply from 2018’s USD 759 million. The average free cash flow break-even in 2018 was just USD 31.80. Those creditably low costs were achieved despite both planned and unplanned shut-downs, including PNG earthquake.
Santos still targets production growth to greater than 100 mmboe by 2025 versus 58.9 mmboe in 2018. Our model fully credits that being achieved. Pleasingly, Santos says it is able to fund that growth, in addition to pay dividends, out of free cash flow at a long-term USD 65/bbl oil price. Unchanged 2019 production guidance is for 71-78 mmboe, capturing a significant boost from a full year of Quadrant. We sit at the high end of the range, confident given the recent strong track record.
At AUD 6.80, Santos shares remain somewhat undervalued, the market not sufficiently crediting expansion potential. Our fair value estimate equates to a 2023 EV/EBITDA of 6.5, crediting five-year non-third-party group revenue CAGR of 11.2% to USD 4.4 billion. This supports five-year EPS CAGR of 8.9% to AUD 0.73 by 2023 for a nominal P/E of 10.7 at the current AUD 6.80 share price, or 17 when discounted at WACC. Our comfort to credit such production levels is supported by growth projects and favourable activity on Santos’ part. Upstream unit production costs came in at USD 8.17 per boe in 2018 and guidance for 2019 is for an improved USD 7.50-8.00 per boe. Cooper Basin unit production costs were down 12% to USD 8.17/boe in 2018. Santos is drilling an increasing proportion of horizontal wells to lower unit production costs. Equity gas production continues to build at GLNG and Quadrant integration synergies are advancing. Quadrant delivers high margin gas production with CPI linked contracts.
Santos drilled a record 305 wells at GLNG in 2018, up 77% and expected to increase to 350-400 wells in 2019. Similarly, Cooper Basin well numbers rose 40% in 2018 to 85, with an expected jump to 100 wells in 2019. In conjunction with growth projects including PNG LNG expansion and Barossa backfill to Darwin LNG, we see little reason to doubt production expansion to 100 mmboe. That doesn’t include appraisal of the exciting Dorado oil discovery which came with Quadrant, nor ultimate expansion potential at GLNG. Appraisal of the Dorado discovery is planned for 2019 to be followed by a look-alike target at Roc South.
Santos finished the year with an increased USD 3.6 billion net debt load following the USD 2.15 billion purchase of Quadrant. Somewhat elevated net debt/EBITDA of just over 2.0 is manageable and we expect it back to 1.0 levels by as soon as 2022.
Santos is a natural gas company engaged in the exploration for, and development, production, transportation and marketing of, hydrocarbons. Co.'s operating segments consist of five key assets/operating areas of: Cooper Basin; Gladstone LNG; Papua New Guinea; Northern Australia; and Western Australia gas; based on the nature and geographical location of the assets, plus Other non-core assets. Co.'s proved petroleum reserves were 485.0 million barrels of oil equivalent at Dec 31 2016.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.