new broker report, page-9

Bell Potter:

·Santos Limited - Gunnedah Basin (NSW) CSG acquisition

Santos Limited (STO.AX - A$14.39) Buy Target A$17.20

Santos is acquiring 19.9% of Eastern Star Gas (ESG.AX) from Hillgrove Resources (HGO.AX) for A$176m, and also Gastar's 35% stake in ESG's main asset - the Narrabri CSG project (ESG 65%) for A$300m. All up Santos has agreed to pay A$476m, or A$0.76/GJ 3P for the ESG and Gastar interests. In our view, NSW CSG is expected to end up mainly in power generation, or it may be used for domestic supply to supplement existing Cooper Basin gas supply contracts into NSW. ESG has current booked reserves of 2P: 336PJ, and 3P: 1300PJ. ESG also has 3,053PJ of 2C contingent resource (ESG 65%). ESG is also aiming to convert 1300PJ of 3P to 2P CSG reserves by the end of this year. NSW is expected to see significant reserves booked in the next few years by companies such as Eastern Star Gas, Santos, Carbon Energy, and AGL. Despite potential for significant reserves bookings, we see limited corporate opportunities Our NAV estimate of A$11.46 is a DCF (10% nominal discount rate) of forecast cash flows over the 2P reserve life of producing assets and committed projects plus PNG LNG and a 19.9% stake in Eastern Star Gas. Our 12-month share price target is A$17.20 (prior A$17.00) and is based on our NAV estimate, plus potential projects (Gladstone LNG, Reindeer, PNG LNG T-3).

DYOR...