Santos

While fighting cost inflation at its two giant LNG projects, at Gladstone (GLNG) and in Papua New Guinea (PNG LNG), Santos has confirmed that output will rise substantially between now and 2020. From current levels of about 50m barrels of oil equivalent (mmboe), output is set to soar to 90mmboe by 2020. For a company that has spent the past decade with stagnant production, it’s an important achievement.

Existing fields are forecast to decline from 50mmboe to 30mmboe over that period but newly sanctioned projects, including the troublesome LNG projects as well as conventional projects in Vietnam and offshore Western Australia, will more than compensate for that fall.

A risk remains; Santos is short of reserves on its troubled GLNG project, but that shortfall is being filled by third party gas (Origin Energy is selling excess reserves to Santos) and shale gas presents another resource option. The newly discovered Moomba-191 well, the first operational shale gas well in the country, has produced at astonishing flow rates, suggesting shale gas may be used to plug reserve shortfalls at GLNG. The scepticism shown by the market may not be warranted. The company also announced a significant new gas discovery in the Browse Basin, offshore WA, known as Crown-1. Any resources outlined from that discovery may go to shore up reserves at the Darwin LNG project.

Our investment thesis has been simple; we’ve argued the company is morphing from a gas business to an oil business with higher output and fatter margins. That imagining appears to be taking shape nicely. Santos’s share price is down 9% since 17 Aug 12 (Long Term Buy – $11.82) and it remains an attractive LONG TERM BUY.