Stock Focus
Santos Ltd: We await the shareholding caps removal
Target price upgraded to 17.10/share from $15.40/share on higher A$ oil prices and some minor changes to production profile. The higher oil price scenario now included has increased our value for exploration assuming stable finding costs. The resultant margin expansion yields 2% over the cost of equity-which we are comfortable with.
15% share holder cap announcement expected — The SA Government will unveil its decision soon. With an open register and strong leverage to a rising gas price thesis, the stock we believe is effectively in play.
Gladstone LNG Project Adds Growth Going Out — The project could be significant but not without risk. Mitigation of the these risks could be achievable and enough to keep the project on the burner. At this stage we do not include the GLNG project in our analysis, but recognise that on a risked basis it adds a further $1.20/share to our current target price. We will only include the upside through GLNG if the 15% cap is removed. Our thesis is that with the cap removed the market will need to look at Santos as a takeout opportunity. Despite the GLNG project having a long road to travel before commencing in 2014 it does, if it eventuates, provide material upside. Any acquirer with a LNG focus would need to consider its potential.
The Producers Tell Us that Gas Prices Are Going Up — The list is getting longer. It seems inevitable to us that the only way for the domestic East Coast gas industry to grow significantly and take on higher levels of risk through developing csm reserves is if the appropriate returns are available…shrinking margins in an energy landscape riddled with inflation will not cut the mustard!
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