Australian hydrocarbon producer Santos (ASX: STO) reported a 25% decline in 2025 underlying net profit after tax to $898 million. The result reflects steady production of 88 million barrels of oil equivalent, but a 10% decline in average pricing to USD 52.80 per boe. A USD 10.3 cent dividend was declared.

Why it matters: NPAT was 6% below our expectations due to higher other costs. Unit production costs, however, were creditably at decade lows. Most importantly, projects expected to deliver a 30% production increase by 2027 are on track. First gas came from Barossa, and oil from Pikka is imminent.

  • Our fair value assumes a five-year group EBITDA CAGR of 14%, to USD 6.0 billion by 2030. This includes a near 80% production increase to over 150mmboe, driven initially by new projects, Barossa LNG and Pikka phase 1, but later by Dorado oil and PNG LNG.
  • We assume a midcycle EBITDA margin of 78% excluding third-party sales. This improves on 2025’s 73%, anticipating lower costs from Barossa and Pikka, in addition to USD 150 million in annual structural cost savings flagged by management. Second half 2025 margin improved to 75%.

The bottom line: Our $10.50 fair value estimate for no-moat Santos stands. With shares around AUD 6.65, we think the market is overly bearish, potentially not crediting PNG LNG expansions or Dorado oil. We assume these additional projects will come online.

  • Santos has the balance sheet to invest in growth. Net operating cash flow was USD 3.3 billion in 2025, meaning net debt climbed only 8% to USD 4.4 billion, despite USD 2.5 billion in capital expenditures and USD 800 million in dividends and buybacks.
  • With Barossa and Pikka now essentially online, further value-accretive growth can be targeted. Currently, over 60% of Santos’ revenue is derived from LNG. The company is geographically advantaged to service Asia, where LNG demand is expected to increase by more than 60% in the next decade.

Key projects commissioning and decade-low unit costs

Santos is the second-largest Australian pure oil and gas exploration and production company (behind Woodside Petroleum, ASX:WPL), with interests in all Australian hydrocarbon provinces, and Papua New Guinea. Santos is now one of Australia’s largest coal seam gas producers with substantial reserves. It is the country’s largest domestic gas supplier.

Coal seam gas purchases in the mid-2000s increased reserves, and partial sell-downs generated cash profits, putting Santos on solid ground to improve performance. Group proven and probable, or 2P, reserves doubled to 1.4 billion barrels of oil equivalent, primarily East Australian coal seam gas. Coal seam gas now represents around 20% of 1.6 billion barrels group 2P reserves.

A degree of confidence can be drawn from project partners. US energy supermajor ExxonMobil, the world’s largest publicly traded oil and gas company, is 33% owner and the operator of the PNG LNG project. The Gladstone LNG project was built and is operated by GLNG Operations, a joint venture of owners Santos (30%), Petronas (27.5%), Total (27.5%), and Kogas (15%). Petronas is Malaysia’s national oil and gas company and the world’s second-largest LNG exporter. French energy major Total is the world’s fifth-largest publicly traded oil and gas company, and Korea’s Kogas is the world’s largest buyer of LNG. Santos is in good company.

Overall, we see a solid future for Santos, aided via improved margins and earnings driven by Gladstone and PNG LNG. The company enjoys export pricing on its gas. In addition to Santos’ Gladstone LNG, several other third-party east-coast LNG projects conspired to drive domestic gas prices higher. As the largest domestic gas supplier, Santos gets significant bang for its buck, with limited additional capital or operating cost required to capture enhanced prices.

Bulls say

  • Santos is a beneficiary of continued global economic growth and increased demand for energy. Aside from coal, gas has been the fastest-growing primary energy segment globally. The traded gas segment is expanding faster still.
  • Santos is in a strong position, with 1.6 billion barrels of oil equivalent proven and probable reserves, predominantly gas, conveniently located on the doorstep of key Asian markets.
  • Gas has about half the carbon intensity of coal, and stands to gain market share in the generation segment and elsewhere as carbon taxes are rolled out.

Bears say

  • Santos committed to substantial LNG capital expenditures, which will see the balance sheet geared in the medium term.
  • Much of the company’s perceived value is in coal seam gas to LNG projects that are yet to reach full capacity.
  • Landholder opposition to coal seam gas development could hinder production growth.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.