Securing Long-Term LNG Agreements Will Sustain Cash Flows Beyond 2029

Key Takeaways

• Santos's production is set to increase significantly with new projects, boosting revenue and lowering costs.
  
• Long-term LNG agreements and strategic reserves position Santos for strong cash flow, supporting growth and shareholder returns.
  
• Regulatory challenges, reliance on new projects, increasing debt, decommissioning costs, and gas supply constraints could pressure Santos' revenue growth and financial flexibility.

Catalysts

Explores for, develops, produces, transports, and markets hydrocarbons in Australia and Papua New Guinea.

• Santos is expected to see a significant increase in production by over 30% by 2027 with the start-up of the Barossa LNG project and the Pikka Phase 1 oil project, potentially boosting revenue and lowering unit production costs.
  
• The company aims to achieve $100 million to $150 million in annual structural savings over the next 1 to 2 years through a comprehensive cost review and technological innovations, which could improve net margins.
  
• Santos has secured long-term LNG supply agreements with tier-1 customers, locking in revenue streams until 2029 and beyond, allowing them to capitalize on market opportunities and sustain robust cash flows.
  
• Successful operational performance, including projects like Moomba CCS and the high-performing base business, supports Santos's strategic position for sustainable growth, potentially enhancing its earnings through effective capital utilization.
  
• The strong reserves and resource position, combined with strategic LNG assets poised for long-term growth, provide Santos with opportunities to optimize production and cash flow through lower-cost developments, supporting shareholder returns.

Santos Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Santos's revenue will grow by 7.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.7% today to 25.3% in 3 years time.
• Analysts expect earnings to reach $1.7 billion (and earnings per share of $0.53) by about February 2028, up from $1.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.1 billion in earnings, and the most bearish expecting $1.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.3x on those 2028 earnings, up from 11.2x today. This future PE is lower than the current PE for the AU Oil and Gas industry at 14.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.26%, as per the Simply Wall St company report.

Santos Future Earnings Per Share Growth

Risks

• Santos faces potential regulatory and environmental challenges with its Barossa project, given its need for final approvals and the delays and activism it has encountered historically. This could impact future production timelines and revenues.
  
• The company's reliance on increasing production from new projects, such as Pikka and Barossa, means any setbacks or delays could adversely affect anticipated revenue growth and net margins.
  
• The increase in net debt to $4.9 billion and gearing within the target range due to ongoing development expenditures may limit future financial flexibility and increase interest expenses, affecting net earnings.
  
• Santos' significant decommissioning obligations, particularly in offshore Western Australia, pose a risk of unforeseen cost escalations, potentially impacting free cash flows and net margins.
  
• Potential constraints in securing third-party gas supply for GLNG due to market dynamics and domestic market demands may elevate procurement costs, impacting net earnings and profit margins.

Valuation

• The analysts have a consensus price target of A$8.007 for Santos based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$9.99, and the most bearish reporting a price target of just A$6.98.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.7 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 12.3x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of A$6.68, the analyst price target of A$8.01 is 16.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.