Santos Limited (ASX:STO)
Current Price: $5.61 | Target Price: $8.95 | Upside: 59.5% | April 23, 2025
Investor Profile Snapshot
| INCOME | VALUE | GROWTH | QUALITY | THEMATIC |
|---|---|---|---|---|
| ★★☆ 65% | ★★★ 80% | ★★☆ 60% | ★★☆ 65% | ★★★ 85% |
Note: This report provides analysis and commentary based on public information and is not intended as investment advice. Investors should conduct their own research and consult with financial advisors before making investment decisions.
In-depth report/analysis on STO can be found in the following PDF file:
Latest Update - 1Q25 Key Takeaways
- Production up 2% QoQ despite weather challenges; Western Australia segment grew 18.6%
- Major projects progressing well: Barossa LNG 95.2% complete, Pikka Phase 1 82.2% complete
- Free cash flow of $465M (↑9% QoQ) despite revenue decline of 8%
- Carbon management advancing with Moomba CCS injecting 231.5 ktCO2e in Q1
- On track for >30% production growth by 2027 vs 2024 levels
What's Changed?
- Barossa Progress: Advanced from 91% to 95.2% complete, with fifth well showing better-than-expected reservoir properties
- Pikka Development: Now 82.2% complete (up from 74%) with potential for early startup before mid-2026
- Revenue Mix: PNG revenue contribution grew to 52% of total, highlighting concentration risk
- Strategic Partnerships: New MOU with Tamboran Resources for Beetaloo gas export options
- Carbon Management: New MOU with North Asian customer targeting 2-5 Mtpa of services
Executive Summary
Santos Limited (STO) delivered a solid start to 2025 with Q1 free cash flow from operations of $465 million, up 9% quarter-on-quarter despite lower revenue.
Production increased 2% quarter-on-quarter to 21.9 mmboe, driven primarily by stronger Western Australian performance where volumes increased by more than 18% following the successful Halyard-2 infill well.
The company's major development projects continue to progress well, with Barossa LNG now 95.2% complete and on track for first gas in Q3 2025. The Darwin Pipeline Duplication is complete, and four wells have been drilled and completed.
Pikka phase 1 has advanced to 82.2% complete, with strong well performance (averaging 6,900 bbls/day) creating the potential for early startup ahead of the mid-2026 guidance. These projects underpin Santos' trajectory toward more than 30% production growth by 2027.
Santos' emerging leadership in carbon management represents a significant strategic differentiator. Moomba CCS has injected over 685,000 tonnes of CO2-equivalent in its first six months of operation, demonstrating Santos' first-mover advantage in this rapidly developing sector.
Financial Highlights
| Key Metric | Q1 2025 | Q4 2024 | Change |
|---|---|---|---|
| Production (mmboe) | 21.9 | 21.5 | +2% |
| Sales volume (mmboe) | 23.3 | 23.6 | -1% |
| Sales revenue ($m) | 1,294 | 1,401 | -8% |
| Capital expenditure ($m) | 613 | 696 | -12% |
| Free cash flow from operations ($m) | 465 | 427 | +9% |
| Moomba CCS injected volumes (ktCO2e) | 231.5 | 224.4 | +3% |
Segment Performance
| Segment | Production (mmboe) | QoQ | Sales Revenue ($m) [QoQ] | Key Developments |
|---|---|---|---|---|
| Western Australia | 5.1 | +18.6% | 193 [-18.6%] | Halyard-2 infill well exceeding expectations |
| Cooper Basin | 3.1 | -6.1% | 132 [-9.0%] | Moomba CCS injected 231.5 ktCO2e in Q1 |
| Queensland & NSW | 3.5 | -2.8% | 302 [-20.3%] | Record GLNG production from Scotia |
| PNG | 10.0 | -2.0% | 672 [+4.3%] | Record 97.2% operated CPF reliability |
| Northern Australia | 0.2 | +100% | 9 [+800%] | Barossa 95.2% complete |
Key Outlook Points
| Category | Current/Near-Term | Medium-Term | Long-Term |
|---|---|---|---|
| Production Growth | 90-97 mmboe (2025 guidance) | 30% increase by 2027 vs 2024 | Continued growth from carbon storage |
| Free Cash Flow | ~$1.0 billion (2025) | ~$2.0 billion (2026) | ~$2.9 billion (2027+) |
| Capital Intensity | >40% of revenue (2025) | Declining through 2026 | ~20% of revenue (2027+) |
| Shareholder Returns | Current dividend policy | At least 60% of FCF from 2026 | Up to 100% when gearing below target |
| Carbon Management | Moomba CCS operational | WA Reindeer & Bayu-Undan in development | 6 Mtpa carbon storage by 2029 |
| Unit Production Costs | $7.00-7.50/boe (2025 guidance) | Declining as projects ramp up | Further efficiencies as scale increases |
Color Key:
- Positive for the company
- Neutral or moderate
- Challenging or negative
Valuation Summary
Our analysis derives a base case valuation of $8.95 per share, representing 59.5% upside to the current price of $5.61. This valuation is primarily based on a Discounted Cash Flow (DCF) methodology, which most appropriately captures the company's approaching inflection point in production and free cash flow generation, as well as the potential long-term value of its emerging carbon management business.
| Methodology | Implied Price Per Share |
|---|---|
| DCF - Base Case | $8.95 |
| DCF - Bull Case | $11.75 |
| DCF - Bear Case | $6.50 |
| EV/EBITDA Multiple - NTM | $5.25 |
| P/E Multiple - NTM | $5.10 |
| EV/2P Reserves Multiple | $6.15 |
| PEG Ratio (P/E to Growth) | $6.40 |
| Implied Valuation Range | $6.50 - $8.95 |
| Current Share Price | $5.61 |
| Up/Downside to Base Case | +59.5% |
Our Bottom Line
Santos is successfully executing its dual transformation strategy, with major projects nearing completion that will drive significant production growth and free cash flow expansion. The Q1 2025 update reinforces our view that the company is approaching an inflection point, with Barossa at 95.2% completion and Pikka at 82.2%, both tracking on or ahead of schedule.
While commodity price volatility and regulatory uncertainties present challenges, Santos' disciplined low-cost operating model (breakeven <$35/bbl) provides resilience through market cycles. The company's emerging leadership in carbon management, highlighted by operational success at Moomba CCS, positions it favorably for the energy transition.
We believe the current valuation doesn't fully reflect the magnitude and timing of Santos' approaching cash flow transformation, nor the strategic value of its balanced portfolio spanning traditional hydrocarbons and emerging carbon management services.
What to Watch
- Barossa Completion: Progress toward Q3 2025 first gas target
- Pikka Timeline: Any announcement of potential early startup
- Free Cash Flow: Quarterly progression toward 2026 inflection
- Carbon Management: Additional commercial agreements for CCS services
- Regulatory Developments: Progress on Bayu-Undan CCS framework and Narrabri approvals
Project Timeline
Barossa LNG (95.2% complete)
- Now: Four of six wells completed, Darwin Pipeline Duplication complete
- Q2 2025: Complete final wells and subsea infrastructure
- Q3 2025: First gas expected
- Impact: Critical growth project to backfill Darwin LNG
Pikka Phase 1 (82.2% complete)
- Now: 17 wells drilled, 120-mile pipeline substantially complete
- 2025-2026: Complete 27 total wells by mid-2026
- Mid-2026: First oil (with potential for early startup)
- Impact: 80,000 bopd gross expected at plateau
Carbon Management Projects
- Moomba CCS: Operational since Sep 2024, injected 685,000 tonnes to date
- Western Australia Reindeer CCS: Early FEED stage, potential post-2027 startup
- Bayu-Undan CCS: FEED 97% complete, awaiting regulatory framework
Tailwinds
Major Project Delivery Excellence:
- Barossa now 95.2% complete, on track for Q3 2025 first gas
- Pikka 82.2% complete with potential for early startup
- Fifth Barossa well showing "properties at higher end of pre-drill expectations"
- Pikka wells delivering up to 7,850 barrels per day in initial 30-day tests
LNG Demand Growth:
- Wood Mackenzie projecting 13% global gas demand growth to 2034
- Asian demand expected to grow 34% through 2034
- Global LNG demand projected to expand 55%
- Santos contracted through 2030s with high-quality counterparties
Carbon Management Leadership:
- Operational Moomba CCS demonstrating first-mover advantage
- MOU with North Asian customer targeting 2-5 Mtpa of services
- FEED work progressing on two additional CCS hubs
- Potential to transform from compliance cost to revenue stream
Low-Cost Operating Model:
- Free cash flow breakeven below $35/bbl despite inflation
- Record operational performance across multiple assets in Q1
- 99.8% reliability from operated gas facilities
- Model will drive expanding margins as new projects come online
Headwinds
Commodity Price Volatility:
- Q1 revenue down 8% QoQ despite higher production
- Oil-linked LNG pricing lower (JCC averaged $78.31/bbl vs $85.99/bbl in Q4)
- Partially offset by stronger JKM-linked sales ($14.12/mmBtu vs $13.37/mmBtu)
- Hedging provides some protection with 10M barrels for H1 2025
Regulatory and Policy Risk:
- Bayu-Undan CCS needs new regulatory frameworks to progress
- Narrabri gas project awaiting Native Title Tribunal determination
- Operating across multiple jurisdictions increases complexity
- Carbon pricing and emissions policies continue to evolve
Portfolio Concentration Risk:
- PNG contributed 46% of Q1 production
- Vulnerability to regional disruptions or contract renegotiations
- Diversification improving as Barossa and Pikka come online
- LNG portfolio creates product concentration risk
Energy Transition Timing:
- Balancing traditional assets with new carbon solutions
- Uncertainty in transition pace creates capital allocation challenges
- Need to maintain near-term cash flow while positioning for future
- Market valuation approaches evolving for energy transition companies
Discussion