Company Profile - Santos Limited is an oil and gas producer, supplying Australian and Asian customers. The Company is primarily engaged in the exploration for, and development, production, transportation and marketing of, hydrocarbons. The Company develops major oil and gas liquids businesses in Australia, and operates in all mainland states and the Northern Territory. The Company has exploration-led Asian portfolio, with a focus on three core countries: Indonesia, Vietnam and Papua New Guinea. The Company operates in four business units of Eastern Australia; Western Australia and Northern Territory; Asia Pacific, and Gladstone LNG (GLNG). The Asia Pacific operating segment includes operations in Indonesia, Papua New Guinea, Vietnam, India and Bangladesh.

Analysis – Santos reported production of 13.1mmboe. Quarterly revenue of $1065 Million was aided by strong sales particularly third party oil. Explortion expense of $103Million was on the higher side due to dry holes  at  Dufrense – 1 and Kupio – 1 during the quarter. Full year guidance for Depreciation, Depletion and Amortization (DD&A) increased to A$17.7/boe from A$16.5/boe previously. This incremental A$1.2/boe stems from non operated assets in Western Australia and Northern Territory. Diven the company achieved A$15/boe during the first half, the new guidance implies A$20/boe during the second half, a 35% increase. Santos pointed to higher future CAPEX cost and lower reserves at non operated projects of  in Northern Territory and Western Australia. We believe that this guidance update could point to reserve downgrades in the Western Australia and Northern Territory business.

There is no hint of cost pressure on development projects. Despite growing market concern, there is no hint of either cost or schedule pressures at PNG or GLNG. That said the rate of upstratm development drilling notable slowed in QLD from 67 to 38 wells as the focus shifts to Fairview where wells take longer to drill. Meanwhile in NSW STO’s Narrabri drilling campaign is underway and seemingly not throwing up any surprises.

The increase in DD&A was due to updated operator estimates for future development costs this is primarily due capex cost inreases for non operated projects and anticipated changes to reserve bookings for Australian offshore assets – this implies that some of those assets will experience a reserves downgrade thereby increasing the allocation of depreciable asset cost base to the lower remaining reserves. Santos realised a gas price for 4Q13 of A$5.29/GJ. 3Q2013 represented a record high for average realised gas pricing across Santos’ diverse portfolio of East and West Coast assets primarily Cooper Basin and Carnavron Basin gas along with South East Asian non-LNG assets.

The 4Q2013 result was agood one with 13.1 mmboe of production reported. Sales volume was of 15.6mmboe including 3^rd party sales of 3.5mmboe. Sales revenue was A$1,065Million including 3^rd party sales of A$297 Million. The sales revenue was on ahigher side  due to a larger proportion of Oil in the sales mix. The gas price realised for the 4Q2013 was A$5.29/GJ. The slightly weaker price may reflect lower seasonal demand.
There are quite a few uside risks for the stock price of santos which include rising oil and domestic gas prices along with weak A$ VS US$ in the long term, exploration success for PNG LNG train 3 along with Cooper infill and NSW CSG development.

Oil was the only product in which the company grew production, with all other products declining versus the prior quarter and the corresponding period. Cooper Basin Oil continued to deliver producing 848kb. Fletcher Finucane delivered 884kb after water separation issues impacted productionin the prior quarter. A strong realised oil price of A$127.16/b on a weakening A$ combined with strong growth in oil production to underpin a sales revenue of A$1065 Million for the period.Oil production accounted for 56% of sales revenue, up from 52% in 3Q2013.


Source - Thomson Reuters

Activities are accelerating in onshore gas to capitalise on future market opportunities atw higher prices on a number of fronts. Pad drilling for conventional gas near Moomba is accelerating. Three unconventional shale gas projects are underway and in NSW drilling operations have resumed on the Narrabri CSG project after a very long hiatus.

There was no change to the most recent PNGLNG news, with more than 90% completed, with start-up scheduled for second half of 2014 and commissioning gas flowing into the pipeline and liquefaction plant. At hhides 4 of the 8, initial production wells are complete and work has begun on the remaining four.

In terms of GLNG, this project is reported to be 72% completed and remains on schedule for first gas in 2015. Fairview and Roma Wells have been tied into new water disposal infrastructure and the gas transmission pipeline remains on track for 2Q14 completion.


Hides Gas Conditioning Plant, PNG LNG (Source – Company Reports)

STO	Industry Median	2012	2011	2010	2009	2008
Profitability
Gross Margin	43.3%	35.1%	36.2%	34.9%	35.3%	48.7%
EBITDA Margin	35.5%	51.4%	51.2%	51.9%	51.1%	62.4%
Operating Margin	26.4%	28.4%	47.1%	34.4%	32.5%	93.5%
DuPont/Earning Power
Pretax ROA	5.8%	5.6%	8.7%	6.3%	6.8%	29.6%
ROE	10.8%	5.7%	9.1%	6.9%	7.6%	43.6%
Liquidity
Quick Ratio	1.25	2.24	3.01	3.10	3.01	1.62
Current Ratio	1.47	2.49	3.21	3.26	3.26	1.84

The cooper unconventional will deliver some key data points in the coming months and we expect flow results from Roswell -2, Van der Waals – 1 and lagmuir – 1 during 1 Quarter 2014. Santos is quickly building a significant portfolio of results in the unconventional play.

We will again emphasise some of the key points about Santos.  Delivery of the GLNG and PNGLNG projects on time and within budget are important factors going forward. Santos is leveraged to the rising domestic gas prices. It has got the ownership of onshore gas production infrastructure and is investing to expand. Bonaparte LNG (Santos is a partner in the Bonaparte LNG joint venture which aims to develop the Petrel, Tern and Frigate fields in the Bonaparte Basin using floating LNG technology. ), shale gas and offshore Western Australia gas discoveries can be a key value driver. Some other key drivers would be higher oil prices, falling A$ vs US$ and growth in conventional and shale gas resources in the cooper basin. We continue to like the unconventional play in the cooper basin, with all that entails – a basin centred gas play, shale gas, tight sands, wet gas and dry gas windows. We will be putting a BUY on Santos at the current price.

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