Santos: The trend has turned
In the true tradition of denial, we have maintained our position in Santos, and in fact, have added a modest amount over the past 12 months. Whilst it has been a particularly challenging period for both the company and investors, there are growing signs that the ship has been righted and that there are better times ahead.
1) Drilling Costs : drilling costs have declined and most of this is structural (estimated at 75%) not cyclical (ie labour costs etc , 25%). Some dramatic examples:
- $6m /28 days to drill a well in the Cooper basin in 2014; today $2.8m / 12 days.
- Aroma well cost $5m at FID; today <$1m.
2) All Costs : Santos sighted FMG as an example of an organisation that has transitioned from top quartile to bottom quartile on the cost curve through the relentless pursuit of efficiency and by challenging every aspect of what they are doing. This is the first time in nearly a decade that STO has not had a major project under development, which provides an opportunity to focus almost exclusively on costs.
3) Long Life Assets: 4 assets have decade plus lives with very little/further development. This provides a solid platform for growth.
4) 3 Growth projects; Santos’s existing portfolio offers multiple growth options. The top 3 priorities at present are to:
- Triple production from Darwin LNG (by 2022/23)
- Expand its involvement in PNG LNG by leveraging the Muruk discovery to become a partner in 3 trains with revenue from a 4th by (2024)
- Progress Narrabri – initially by bringing this asset into its core portfolio with a view to finalising a decision and structure by late 2020. The original IRR was robust on old numbers – new cost estimates will further enhance the economics and by a significant margin.
5) GLNG 6mtpa: Santos now see GLNG as a 6mtpa producer rather than 7.8mtpa (nameplate) or 8mtpa+ (streamlined). This level of production can be met from:
- Own gas plus
- Already contracted gas from 3rd parties (via ~5 long term existing contracts).
Production will spike above this level ‘opportunistically’- ie where there is surplus gas in the system at a good price – but not as a base case. This re-thinking makes a lot of sense given the tightness in the east coast gas market.
As a final point, STO noted that the gas price makes up only 27% of the total cost of electricity. The sense is that the Government may be shifting its focus from gas producers to the electricity generators themselves.
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Katana Asset Management was founded in September 2003 as a boutique investment management firm. Katana employs an all opportunity investment mandate being style, sector and market cap agnostic.