The top line for Santos looks good.

It’s an oil and gas business, and many of the prices received across the commodity complex have normalised from the pandemic, and the war, which resulted in acute dislocations in either direction.

What’s most interesting is that capex is close to a peak, and as projects are delivered the cashflows go up and the capex goes down, resulting in strong free cash flow generation.

And that FCF profile looks like the below, on the assumption of $75bbl for brent, and $12/mmbtu for JKM.

Management highlight those projects below, in the Q&A (Barossa, in 2025, Pikka the year after).

Gearing is not high, Santos can fund this next, last leg of capex quite readily.

Returns should likewise step up (these projects are PPE and on the balance sheet, but don’t generate revenues).

The market didn’t reward Santos at all, during the crazy hydrocarbon price spike of the past few years. You can see near term earnings (12, 24 months out) went up, but the share price didn’t react.

This is the oil and gas overhang, and perhaps also Santos specific concerns about unlocking value, with mgmt trying to pursue growth, when some investors just want O&G companies to essentially sunset, from here on out.

We think long run hydrocarbons go to zero. Equally, we think oil and gas markets have at least 10 years ahead of them. Both statements can be true.

With Santos you are paying ~12x earnings, on earnings that should (assuming those projects are delivered and commodity prices don’t collapse) grow, meaning a lower multiple shortly down the track, on a balance sheet that is quite robust, with assets that are generating good cashflows now.

Since the market doesn’t seem to value that optionality, the company has tried to put itself “in play”, e.g., the recent M&A interest from Woodside, and really any one else that wants to play. It’s not quite like the “for sale” sign is up, but since there’s been a lot of consolidation in the sector, Santos’ is conscious of being seen as open and co-operative.

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This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

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