$14 close?, page-21

Ord Minnetts"Opening Bell" market research today.

Santos Limited (STO A$12.76), Buy
Thoughts re potential Shell involvement in GLNG - ALERT
􀂃 Media outlets (AFR and Australian) both report that STO is on the verge of entering an agreement with Shell for equity
participation in GLNG. Reports have variations on the same theme. Australian is indicating Shell is competing with
Kogas/Sinopec for the 9-20% of GLNG that STO is willing to sell down from its current 60% position. Deal is mooted to be
worth "up to $1bn"; if this figure of $1bn (we assume US$) refers to 20%, it is broadly in line with what Petronas paid for its
40% interest in GLNG on a pro rated basis. Petronas paid US$2bn for a 40% interest with a US$500m milestone payment
upon approval of a 2nd train. Note that Santos has confirmed in a release that it remains in discussions with multiple parties
regarding participation in GLNG but that there is no guarantee that an agreement will eventuate.
􀂃 AFR is indicating Shell is in discussions with STO for a 30-35% interest in GLNG with Kogas and Sinopec is signing up for
offtake contracts. Furthermore, AFR indicated that Shell would take over operatorship of the downstream elements of the
project (presumably to be combined with the Shell Curtis Island project) and STO would retain operatorship of its upstream
operations. Deal is mooted to be worth $2bn which represents a better price than Petronas buy in at either 30% or 35%.
􀂃 Who is correct? It is difficult to assess which report has its facts straight. The AFR article has more detail, specifically
around operatorship, but the level of equity participation at 30-35% seems high. If 30-35% were correct, we would assume
that ~20% would come from STO's 60% current stake and a further 10-15% from Petronas' 40% stake. We think it is unlikely
that STO would look to sell down to a level lower than what Petronas holds. Additionally, it would be inconsistent with recent
trends in LNG market for Kogas and/or Sinopec to sign up for large LNG offtake contracts without also acquiring equity in a
project.
􀂃 Shell motivation. Shell's supposed interest in GLNG is not entirely out of left field, and it is the most logical party to lead the
continued consolidation of the Gladstone projects given, 1) its extensive working relationship with Petronas, 2) its
downstream operatorship experience and balance sheet to combine Arrow and STO projects and, 3) labour constraints if
there were 4 projects to be pursued independently on Curtis Island.
􀂃 Our STO group DCF valuation assuming 2 GLNG trains is ~A$18.40/shr (assumes US$75/bbl and 0.75US$/A$ LT). This
valuation incorporates a 19% selldown for gross proceeds of US$950m (which we assume is wholly taxable).
􀂃 Regardless of which report is more correct, the presence of Shell (and the numbers being mooted) should be a positive for
STO. In our view, the factors holding back STO's share price recently have been concerns that, 1) STO could not sign up
more customers, and 2) project execution risk given STO's lack of downstream LNG operating experience. A Shell, Sinopec,
Kogas solution largely nullifies both concerns. We continue to recommend STO as our top pick in Aust oils space.

DYOR