Santos (ASX: STO) from MorningstarOur $12.30 fair value for...

Santos (ASX: STO) from Morningstar

Our $12.30 fair value for Santos stands. Australia's second-largest oil and gas producer reported a 37% decline in first-half 2023 underlying NPAT to $801 million US or $0.36 per share, considerably ahead of our USD 706 million expectations. It was a strong result in the face of weakening energy prices, though we read no long-term implication from the fact. Revenue declined 22% to $3.0 billion US, with average pricing down 7% to $62.60 US per barrel of oil equivalent and production down 13% with Darwin LNG in runoff and a temporary shutdown of the John Brookes platform in Western Australia.

The beat reflects lower-than-expected operating costs and tax, partially offset by higher-than-anticipated depreciation. The margin on third-party sales was higher than we expected, and administrative costs were lower. Despite the strong first half, our 2023 EPS is little-changed at $0.68. We have tempered margin expectations for the second half given the inflationary environment. Santos hasn't changed any 2023 guidance, including for production of 89-93 million barrels of oil equivalent, or mmboe. We still sit at a high-end 93mmboe, with Santos having produced just over 45mmboe in the first half. Capital expenditure guidance for 2023 is unchanged at $2.7-2.8 billion US.

Santos declared an interim dividend up 14% to $8.7 US cents per share on a 36% payout. This was ahead of our $7.9 US cent expectations, and we increase our full-year target slightly to $15.5 US cents from $15.0 US cents. It still equates to a middling yield of 3.1% at the current share price. Somewhat surprisingly there was no franking with the first half dividend though we still anticipate partial franking with the second half.

Effective delivery of the Barossa project is a key potential catalyst for price appreciation toward fair value. So, too, is progress on the Papua LNG project in PNG.