Stock: Santos Limited
Code: STO
Market Cap: $11.9bn
Recommendation: None

Apart from being a common Spanish surname, Santos also refers to one of Australia’s premier energy plays. For local investors, the name is actually an acronym, representing South Australia Northern Territory Oil Search. But since its inception in 1954, the company’s interests have spread far wider than central Australia. With a strong domestic presence in oil and gas, and significant interests overseas, Santos has emerged at the forefront of the global energy evolution.

Santos’s core business was built on oil and gas discoveries in the Cooper Basin and these operations still make up 40% of earnings. From this strong base, the company has become the nation’s largest domestic gas producer and Cooper reserves are the main source of natural gas to eastern Australia. In fact, Santos supplies sales gas to all mainland Australian states and territories, ethane to Sydney, as well as oil and liquids to domestic and international customers. Demonstrating its progression from ‘national icon’ to ‘international player’, the company also participates in on and off-shore exploration and production ventures in Indonesia, PNG, India, Bangladesh, Egypt, Vietnam and Kyrgyzstan.

Santos has come under the spotlight following a $3bn capital raising and concerns that approval of its joint-venture LNG project at Gladstone (Qld) might be experiencing delays. An Environmental Impact Study (EIS) for the export facility has been in the hands of Qld government and there has been speculation that key authorities were not happy with the 13,500 page submission. However, more recent rumours suggest that approval could be given as early as June and investor concerns may be beginning to allay. Despite confusion about the timelines at Gladstone, Santos’s first-mover position has important implications for the potential of the Australian LNG export industry and the company has the jump on the likes of Origin/ConocoPhillips, BG and Shell for the first LNG export facility in Australia.

So just what sort of upside potential do Santos’s LNG interests hold? Well, the $8bn project on Curtis Island, Gladstone, would be the world’s first project to convert coal seam gas (CSG) to LNG on a large scale. Santos is already a producer of LNG through its Darwin LNG project – which has been exporting to Japan since 2006 – however, Gladstone’s scale dwarfs current output. The Gladstone LNG plant will target 3-4mtpa of LNG to export to Asian markets. At current LNG prices of around US$400/t, Santos’s 60% share in the revenue base (40% Petrobas) will equate to hefty payoffs. Gladstone has entered the front end engineering design (FEED) phase for the downstream components of the project and is on track for a final investment decision by the first half of 2010. First LNG exports are expected in 2014 and the plant looks likely to be given the go ahead, having undergone close assessment by management for many years.

As if the planned export facility at Gladstone wasn’t enough, Santos also has a 14% stake in a Papua New Guinea LNG export facility also due to be online in 2014. Santos’s share of the PNG JV is not as sizeable as at Gladstone, but anticipated revenue streams will be a considerable addition. The PNG consortium, led by Exxon Mobil, is also aimed at supplying Asian energy markets and will target exports of 6.3mpta. According to research by the International Energy Agency, these investments at Gladstone and PNG should be in high demand, with forecasts for a rise in global energy consumption of 45% between now and 2030. In excess of 80% of this growth in energy demand will be met by fossil fuels, including natural gas. Energy consumption growth is expected to be driven by Asia with its sheer market size and economic growth prospects.

On top of the CSG assets in Queensland, Santos also has large CSG tenements in the Gunnedah Basin, NSW. Official reserve estimates are yet to be established, however initial estimations are for 40TCF of gas. While the company remains heavily focused on expenditure at its Gladstone and PNG LNG ventures, corehole drilling and seismic surveys are still scheduled over the next 18 months. First contingent gas resource estimates are expected to be booked this year and could be a share price driver.

So with the recent capital raising taking place at $12.50 – a 27% discount to the listed price at the time – investors may be asking does Santos offer value? In answering this, Santos needs to be divided into current operations and expected future cashflows. With a strong earnings base out of the Cooper region and total company reserves at over 1 billion barrels of oil equivalent, Santos current position is very healthy. But with a combination of future earnings from Gladstone and PNG, Santos’s growth prospects are looking equally strong and earnings could double when these projects are operational. For now we are initiating coverage on the stock but with key stgelopments still on the horizon, we suspect imminent newsflow still needs to be digested.

Joshua Terlich is an analyst at Please note that simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of You should seek professional advice before making any investment decisions.


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