Here ya go,
The market has got it wrong on the hit to Santos from the government's looming LNG export controls, and the policy may in fact have positive benefits longer term by accelerating the development of resources within its $US18.5 billion GLNG venture.
That's the view of Citigroup equity analysts, who suggest that the 25 per cent-plus slide in Santos' shares over the past six months – in contrast to the roughly flat performance of its peers – isn't justified.
The stock lost another 2 per cent on Tuesday to $2.98 after the government confirmed the LNG export controls, down from about $4.50 12 months ago.
Investor confidence in Santos has been dented by the surprise equity raising in late December and by concerns about the impact of the Australian Domestic Gas Security Mechanism, to be put in place on July 1.
But with the ADGSM policy – which can limit LNG exports – seemingly focusing on delivering "LNG netback" pricing to east coast customers rather than discounted gas, there may be "little near-term impact" for GLNG, Citi said.
According to analysis by JPMorgan, spot prices for local customers were about $1 gigajoule higher than the "netback" price for an LNG exporter, well down from the peak in February when domestic customers were paying over double international prices.
But Citigroup's view contrasts with a more bearish assessment from equity teams at Macquarie Research and Credit Suisse. The final policy is expected to be released by the government next week.
Santos chief executive Kevin Gallagher last week voiced several objections to the policy, saying it unfairly targeted GLNG and would be of little use for local manufacturers because it would result in Queensland's most expensive gas being diverted to the east coast market, rather than the cheapest.
'Negligible impact'
Citigroup's energy analysts led by Dale Koenders said the initial market fears about the impact of the ADGSM are "slowly appearing to be over-stated".
They said the GLNG venture could buy spot cargoes to meet its own LNG delivery contracts and pass the cost on to domestic customers, resulting in "negligible impact to stock earnings and valuations".
They also noted that the latest study from the Australian Energy Market Operator forecast no gas shortage after all in 2018, in contrast to a report in March. Federal Resources Minister Matt Canavan is due to decide in September whether the east coast market is tight enough to warrant triggering the export controls for next year.
The Citi analysts argue that the bigger question for Santos and the GLNG venture is around longer-term supply for the export plant in Gladstone and whether the uncertainty caused by the ADGSM causes the partners to develop more of their own resources rather than rely so heavily on third-party gas.
GLNG's contracts for gas purchased from producers outside the venture start expiring in 2020, and the political and social pressures around the overstretched east coast market may cause the partners to bring forward the development of new fields within the venture such as Arcadia, rather than extend those contracts or sign new ones, they said.
While that would involve higher capital investment, it would deliver greater value post 2020, they said, noting that GLNG is "currently short reserves, but it is definitely not short gas".
The analysts' assessment is still based on a situation where GLNG limits production to its circa 6 million tonnes a year sales contracts.
"We think that there is an emerging scenario... where circa 6mil tonne pa of production is the right number, but it is supplied by equity gas production and not third-party supply," the analysts said.
Citigroup still cut its target price for Santos shares by 4.5 per cent to $5.15, after downgrading its forecast for gas production from the GLNG venture's Fairview and Roma fields.
The target price, however, is almost 73 per cent higher than Tuesday's close.
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Here ya go, The market has got it wrong on the hit to Santos...
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