In 2008 gas was a star performer with the ORG deal and QGC deal...

In 2008 gas was a star performer with the ORG deal and QGC deal giving the sector a big boost. We believe2009 will see this trend continue as the global majors fight to secure quality gas reserves. We have already seen this in the past couple of weeks with AOE and PES. ABN AMRO have refreshed Santos forecasts toreflect the recent pull-back in the oil price and the weaker Aussie dollar. We believe STO offers good value at current levels, as well as a free option on potential corporate activity. ABN AMRO Buy recommendation and target price $20 Source: IRESSShareholder cap removal opens the door to potential corporate activity... Much of the growth in global LNG supply is likely to come from Oz in the medium term and large oil companieswanting a piece of the action may turn predator. STO could be an early candidate for what we expect to be awave of M&A from international oil companies keen to cost-effectively provide real volume growth. WE have already seen a lot of corporate activity in the sector. Key fundamental driver is monetisation of domestic gas reserves While the oil price has begun to recover, STO continues to forge ahead with its plans to establish a CSG toLNG project at Gladstone which will be critical if the group wants to monetise a large portion of its growingnatural gas reserves. Should STO and its partner, Petronas, fail to deliver the project on a timely basis, thefallback option would be selling the gas into what we believe would be an over-supplied domestic gas market. The group’s new power-generation strategy appears to have some promise, but we are not yet convinced onthe economics of large scale base-load gas-fired generation in the Victorian market. Upgrade to Buy, price target A$20.00/share STO's share price has peeled off significantly from its highs of around $22 in 1H08, which we believe offers agood buying opportunity. Delivery on key LNG milestones should act as positive catalysts. Trade upside in STO through STOVZF, a break of $15 would be bullish