Company Overview - Santos Limited is an oil and gas producer. The Company's principal activities are the exploration for, and development, production, transportation and marketing of, hydrocarbons. The Company's segments include Eastern Australia, Western Australia and Northern Territory (WA&NT), Asia Pacific and Gladstone LNG (GLNG). It is a producer of natural gas, gas liquids and crude oil in eastern Australia. It sells gas primarily to domestic retailers, industry and for the production of liquefied natural gas. It sells gas liquids and crude oil in the domestic and export markets. Its WA&NT operations include domestic gas and oil production in the Carnarvon Basin, exploration activity in the Browse and Bonaparte basins and its liquefied natural gas (LNG) project, Darwin LNG. It has producing assets in Papua New Guinea, Indonesia and Vietnam and exploration assets in Malaysia, Papua New Guinea, Indonesia and Bangladesh. It has interests in GLNG project, which produces LNG.

STO Details
Armour acquiring Santos’ Interests in the Roma Shelf Assets: Santos Ltd (ASX: STO) reported that Amour Energy has exercised their pre?emptive rights of Santos’ interests at Armour?operated tenements at Roma Shelf, Surat Basin assets. After this Sale and Purchase Deed, Armour would have petroleum leases at Kincora Gas Plant which would enhance to 100%, giving more liberty to Armour to perform better operations at these assets across the leases.  This would also accelerate Armour’s intention to restart gas production across these leases, as well as explore and develop in this region.

Armour’s Surat Basin lease position after finishing the Sale and Purchase Deed with Santos (Source: Company Reports)
 
Started the first part of the seismic acquisition program: Santos Ltd also reported that they started the first part of the seismic acquisition program and has acquired over 1,000km of 2D seismic as part of fulfilling the Southern Amadeus Stage 2 farmout obligation of 1,300km. This is done to mature the Dukas and Mahler drill targets as they promise prospects for natural gas and helium while gather data for the Rossini lead. The second part of the seismic acquisition program is acquiring remaining seismic to lead to an overall program to 1,300km. The acquisition program is planned to be finished by the end of March 2017. After finishing the seismic works, the group would have the right to retain an increase in its participating interest from 25% to 40% for EPs 82, 105 and 112 (with EP 106 no longer applying due to voluntary relinquishment).
 
Agreement to farm-in to PNG exploration license: Santos reported an agreement to farm-in for a 20% interest in Petroleum Prospecting License (PPL) 402 in Papua New Guinea, as a part of their strategy to strengthen their position in Papua New Guinea. The group would be getting this stake from Oil Search and ExxonMobil. Moreover, with farm-in STO participation, Muruk 1 exploration well has been spudded, which is targeting the Toro Formation that is gas bearing in the nearby Hides and Juha fields. This exploration well is forecasted to have a mean gas resource of over 2 tcf at a proposed depth of about 3,450 meters.
 
Drilling Updates: As per the November drilling report for South Australian Gas in which STO has 66.6% stake in the joint venture, the five?well appraisal and development campaign was completed on the central flank of the Big Lake Field. The campaign comprised of one standalone appraisal well (Big Lake?134) and four development wells drilled from a single pad (Big Lake?135 to ?138). Further, the campaign aimed to expand the central development area and targeted the Patchawarra Formation, Tirrawarra Sandstone and Merrimelia Formation, and the Epsilon Formation offering a secondary target. Big Lake-138 has now been cased and suspended as a future Permian gas producer. Moreover, for Queensland Gas wherein the group controls 60.06% in the joint venture, two-well program was completed in the Galex Field. In October, Dunadoo East?1 near field exploration well was drilled to test a potential continuation of regional sand trends post the recent successful drilling in the Dunadoo, Coolah and Durham Downs fields. In this, Dunadoo East?1 was plugged and abandoned as it was not a commercial pay.
 
Cooper Basin Wells activity as of October 2016 (Source: Company Reports)
 
STO’s sale of its Victorian assets to restructure the asset portfolio: STO has announced the sale of its Victorian assets to Cooper Energy for cash consideration of up to A$82 million. This would comprise A$62 million upon finishing while a further milestone payment of A$20 million would be made after the earlier final investment decision on the Sole gas project or the receipt of cash proceeds from any sell-down by Cooper Energy of any of its interest in the sale assets. The group believes that this sale is in line with their strategic objective to restructure the asset portfolio and is forecasted to finish by early 2017 after getting the customary consents and regulatory approvals. STO will exit from offshore Victoria after this sale. Moreover, in March 2016, STO has finished the sale of its interest in the Kipper gas field for A$520 million. Additionally, STO has also sold 50% interest in the Casino-Henry gas project to Cooper Energy, and even sold 50% interest in the Sole gas field and the Orbost gas plant. Santos also sold 10% interest in the Minerva gas field and gas plant and 100% interest in the Patricia-Baleen gas field.
 
Third quarter activities: STO has reported 31% growth in the sales volumes to 21.3 mmboe in the third quarter ending September 2016. LNG sales volumes more than doubled to 755,500 tonnes, due to the ramp up in GLNG LNG production and strong performance from PNG LNG. Therefore, the overall sales revenue for the September quarter grew 11% to US$650 million on the back of higher sales volumes, which partially offset lower realized oil and LNG prices. Moreover, GLNG had produced 1.3 million tonnes of LNG in the quarter and has shipped 21 cargoes. Overall, the third quarter production was up 7% to 15.5 mmboe and the initial transactions will be under new oil price hedging policy. STO’s focus on costs is also reflected in their year-to-date capital expenditure which fell over 53% to US$438 million. 

Third Quarter activities (Source: Company Reports)
 
2016 Production Guidance: STO has narrowed the production guidance of 2016 to 60 to 62 mmboe and sales volumes are expected to be in the range of 81 and 83 mmboe. Moreover, STO has lowered the upstream production cost guidance to US$9-9.50/boe produced while capital expenditure guidance has been reduced to US$700 million. 

2016 Guidance (Source: Company Reports)
 
Appointment of CFO: STO had announced the appointment of Mr Anthony Neilson as its new Chief Financial Officer (CFO). Mr Neilson has over 14 years’ of experience in upstream and downstream oil and gas, and has strong financial and risk management skills as he is a Chartered Accountant. Santos intends to use his experience for further cutting costs, enhance operating cashflow and manage its balance sheet to create value for its shareholders. Anthony would join a new Executive Committee in December 2016 and has the technical capabilities needed to transform Santos into a reliable, low cost and high performance business. On the other side, Hony Capital has expanded their stake in Santos by acquiring 40 million shares representing 2.25% of the group’s issued capital at a price of $3.98 by Hony Capital in  November 2016. Hony Capital has enhanced their interest in the company now to over 3.2%.
 
Stock Performance: The shares of STO recovered over 26.9% in the last four weeks (as of December 06, 2016) and we believe this momentum to continue in the coming months given their efforts to strengthen their balance sheet. STO stock is also gaining strength after the Organization of Petroleum Exporting Countries (OPEC), agreed to curb production in order to support the oil prices. So with the recovery in the oil prices coupled with the ongoing cost cutting measures, we believe Santos could deliver a better performance in the coming periods. Moreover, the stock has a good dividend yield. We give a “Buy” recommendation on the stock at the current price of – $ 4.35

 
STO Daily Chart (Source: Thomson Reuters)

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