Think about accumulating Santos

Leyland Private Asset Management

Whilst we don’t see a return of Santos to a share price above $10 anytime soon, a level seen only a few years ago, we believe long term investors should be thinking of accumulating troubled situations such as this for a turnaround.

The history

Santos was founded in 1954 and its name was originally an acronym for South Australia Northern Territory Oil Search. Santos made its first significant discovery of natural gas in the Cooper Basin with the Gidgealpa 2 well in 1963. The Moomba 1 discovery in 1966 confirmed this region as a major petroleum province.

As a result of these discoveries, Santos had a commercially viable quantity of gas and entered into gas sales agreements with the South Australian Gas Company, the Electricity Trust of South Australia and the Australian Gas Light Company. Gas supplies commenced in 1969. Following the discovery of oil at Tirrawarra in central Australia in the early 1970s. A liquids recovery plant was built at Moomba, South Australia along with a fractionation and load-out facility at Port Bonython.

By the 1990s Santos had become a major enterprise with interests in the United States and the United Kingdom and in emerging areas such as the Timor Sea and Carnarvon Basin in Western Australia.

A number of acquisitions in the 1990s provided Santos with additional opportunities onshore and offshore Australia, Indonesia, Malaysia, Vietnam and Papua New Guinea.

Santos today

In 2011 the Santos GLNG project was sanctioned. First production of LNG was announced on 24 September 2015. The first shipment of LNG left Curtis Island on 16 October 2015 and was delivered in South Korea on 28 October 2015.

Santos GLNG is led by Australian company Santos, in partnership with three of the world’s leading energy companies – PETRONAS from Malaysia, Total from France, and KOGAS from South Korea.

GLNG involves ongoing gas field development in the Surat and Bowen Basins, a 420-kilometre gas transmission pipeline, and the construction of an LNG plant on Curtis Island, near Gladstone.

Current market drivers

The Santos share price has fallen dramatically over the last few years due to several factors such as the oil price fall, a relatively high level of debt, examples of poor project execution and, more recently, the government announcing measures to potentially force local gas suppliers to sell within Australia.

On the positive side, the oil price seems to be levelling out, Santos has spent the last two years reducing debt levels and the cost of production to the point where their cash flow breakeven point is down to approximately $US33 from $US36 only a year ago.

Also, the Chinese group of ENN and Hony have bought 15% of the issued capital of Santos and subsequently announced a joint venture to “support the future growth of Santos for the benefit of all shareholders”.

Due to the debt problems and higher costs, Santos has not being paying a dividend. We believe this should change in the near future.

This is an extract from the Leyland Lines monthly newsletter.


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