Hydrocarbon producer Santos (ASX: STO) reported a 22% decline in first-half 2025 underlying net profit after tax to AUD 508 million. The result reflects steady production of 44 million barrels of oil equivalent or boe, but a 6% fall in average pricing to USD 54.60 per boe. A USD 13.4 cent dividend was declared.

Net profit after tax or NPAT was below our expectations. But more importantly, projects expected to deliver a 30% increase in group production by 2027 are on track. First gas from Barossa LNG is imminent, and first oil from Pikka Phase 1 in Alaska has been brought forward by a quarter to the first quarter of 2026.

Our fair value assumes a five-year group EBITDA compound annual growth rate of 10%, to USD 5.6 billion by 2029. This includes a near 70% production increase towards 150mmboe, driven initially by new projects, Barossa LNG and Pikka phase 1, and later by Dorado oil and PNG LNG.

We assume a midcycle EBITDA margin of 77.5% excluding third-party sales. This bettered the first half of 2025’s 71%, anticipating lower costs from Barossa and Pikka in addition to likely USD 150 million in annual structural cost savings flagged by management.

Market overly bearish amid takeover bid

Our AUD 9.50 fair value estimate for no-moat Santos stands. This remains at the approximate midpoint of our unchanged AUD 10 stand-alone fair value estimate and the AUD 8.89 indicative bid proposal from XRG Consortium. With shares around AUD 7.75, we think the market is overly bearish.

Santos has attractive growth options and the balance sheet to invest in them. First-half net operating cash flow was steady at USD 1.7 billion, well ahead of our expectations. Net debt remains modest at USD 4.2 billion: gearing is just 26% and net debt/EBITDA is 1.3.

Santos has agreed to an extension for XRG’s exclusivity period to Sept. 19, 2025. However, even if the scheme progresses, it still needs regulatory approval, including by Australia’s Foreign Investment Review Board. There is no guarantee that a transaction will occur.

First-half underlying NPAT was considerably below our USD 650 million expectations, and we reduce our 2025 underlying NPAT forecast by 20% to USD 982 million. Both operating costs and depreciation were significantly higher than our estimates. However, we read no material long-term implications as it was nonproduction costs that rose.

Unit production costs fell creditably to USD 7.28 per boe, and Santos is targeting just USD 7.00-7.40 per boe for 2025, down around 10% from 2024. We think they will likely fall further, to less than USD 7.00 per boe in 2026, with Barossa and Pikka online.

Guidance for 2025 is unchanged, including full-year production of 90-95mmboe and USD 2.4 billion-USD 2.6 billion in capital expenditure. We remain at the midpoint for both.

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 1.7 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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