|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||5,911||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
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Santos (STO.AU) is a cheap/stressed value Australian equity. STO has traded down from A$13 to A$9.87 on issues relating to an Indonesian JV – Banjar Panji. The long investment thesis is premised on a macro view on commodity prices – forward energy prices are accurately reflected in the futures markets. If one expects oil to trade at under $40 long term this is not the right investment. The catalyst is the equity market overreaction to the Banjar Panji JV dissipating with time. The stock currently trades at under 4 times EV/EBITDA with a dividend yield of 4%.
Fiscal YE 2005 2006E 2007E
P/E adjusted (x) 8.7 7.2 7.6
EV/EBITDA 4.4 3.8 3.8
Dividend yield 3.9 4.1 4.2
EBITDA 1,637 1,902 1,830
Operating cash flow 1,458 1,598 1,470
Assumption of oil at US $60. Production at 66 MMboe.
STO.AU is cheaper than most international mid-cap E&P companies. STO.AU has a stable cash flow generating domestic onshore natural gas franchise. The international E&P operations are more exploratory and risk in nature but have greater upside and optionality to the pacific basin LNG sector.
STO is trading at P/E of 8 versus 12, 4 EV.EBITDA of 4 versus 6 and a dividend yield of 4% vesus1.6% for comparable E&P companies in
The trading in line with comps – STO should trade around A$12. There is additional upside as projects in
The market has reacted negatively to the Banjar Panji accident and to lower than expected output/reserves at the Jeruk project in
Banjar Panji Event
Banjar Panji JV has been the main overhang on STO. The main issues with Banjar Panji are liabilities arising from the drilling accident and the impact of the accident on the relationship STO has with the government in
The uncertainty relating to the Banjar Panji accident has become a significant overhang on STO stock. The sell side analysts covering the situation have STO’s liability number ranging from $180 mil. to over $1 bil. This uncertainty in liability along with Indonesian (emerging market) location has negatively impacted STO stock.
Banjar Panji Accident
Banjar Panji-1, which is located onshore East Java in the Indonesian Brantas PSC, was drilling in late May 2006, two days after an earthquake when the well intercepted a mud volcano at depth. It is estimated that the mud is flowing at between 100,000 to 150,000cm/day, which equates to a very significant 600,000 to 900,000bbls of mud/day. So far the mud flow covers an area of around 435 hectares and has resulted in around 3,500 families being relocated.
www.santos.com investor relations web site has a presentation on the Banjar Panji accident.
The JV participants in Banjar Panji-1 are Lapindo Brantas 50% (Operator), PT Medco 32% and
Banjar Panji Timeline
Lack of Corporate Control Actions: STO ownership is restricted to 15% by the government of
Commodity Risk: A long term decline in oil and natural gas commodity prices.
Indonesian Sovereign and Legal Risk: STO operates its E&P operations in developing countries. There is some emerging market and sovereign risk. But STO revenues are mainly $ denominated as its underlying commodities are global traded and its costs in developing countries is not dollar denominated.
Resolution or better understanding of Banjar Panji accident by the market: The resolution of the Banjar Panji accident and the realization that STO is a minority member of a JV with limited liability. The other JV member is Medco Enrgi – the largest E&P company in
STO has stated that they are adequately covered by their insurance.
STO has made significant investments in LNG – Darwin LNG (supplied by Caldita/Barossa fields). As global LNG market and the Pacific Basin LNG market develop, STO by adding another LNG train at the Darwin LNG facilities could have significant upside. Another LNG train at
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