Santos Has Built Its Growth, and Now Managers Want to See the Cash

With Barossa and Pikka ramping up and Papua LNG heading toward a final investment decision, fund managers see an earnings and cash flow inflection, even as the Iran conflict whipsaws the oil price.

· 5 min read

Through the capex hump

After years of heavy investment, the story fund managers tell about Santos has shifted from building to harvesting. L1 Capital said in its September quarterly that the company is nearing the end of a major investment phase, with Pikka and Barossa approaching steady-state production, and that together with higher energy prices this should drive a sharp increase in second-half earnings growth. Auscap Asset Management, which built a position early in 2026, said Santos is now “through a major CapEx cycle” and into the cash generative stage.

Datt Capital framed the shift in April as a turning point for capital allocation: “It's over that big CapEx hump, and now it's probably the time to harvest and make a decision on what it does with all the cash it's generating.” Pendal Group, reviewing the investor day held at the end of May, said it expects 60 per cent or more of free cash flow to come back to shareholders as the balance sheet de-gears over the next two to three years.

It's over that big CapEx hump, and now it's probably the time to harvest and make a decision on what it does with all the cash it's generating.

— Datt Capital, Article, April 2026

The projects that changed the profile

The inflection rests on two projects that took years to deliver. Barossa shipped its first LNG cargo in January 2026, and Pendal reported the start-up of the Pikka oil development in Alaska in May, describing it as largely on time but over budget and entering the portfolio at a good moment for crude prices. Investors Mutual Limited said the two projects are expected to add about 25 per cent to total production over a full year, and Cerutty Macro Fund cited FY26 production guidance of 101 to 111 mmboe, up from 87.7 mmboe in FY25.

Cerutty's March analysis set out why this matters more than the oil price. Consensus free cash flow is expected to swing from negative during the peak capex cycle into material positive territory as capital intensity normalises, the manager said, with management targeting greater capital returns supported by a 10 per cent headcount reduction and US$150 million of annual structural cost savings. Crucially, Cerutty said it is comfortable owning Santos in a normalised environment: “If it resolves, we own a quality large-cap energy name moving through a genuine production inflection with material earnings and cash flow growth ahead of it.”

If it resolves, we own a quality large-cap energy name moving through a genuine production inflection with material earnings and cash flow growth ahead of it.

— Cerutty Macro Fund, Monthly Report, March 2026

Oil leverage in a volatile year

The Iran conflict has made Santos one of the more volatile large caps on the ASX. L1 noted that Brent crude more than doubled in the March quarter as the Strait of Hormuz was disrupted, then oil retraced in June as de-escalation looked likely, before renewed disruption drove prices higher again. Blackwattle Investment Partners said in September that Brent was trading above US$100 a barrel and that Santos provides leverage to elevated energy prices, an important offset to inflationary pressures elsewhere in the portfolio. Auscap quantified the sensitivity, saying every US$10 move in Brent equates to about US$550 to US$600 million of extra cash flow.

That volatility has driven active trading. Ellerston Capital exited in the June quarter, and Collins St Asset Management reduced its position as valuations appeared to overshoot on geopolitical developments while keeping a bullish long-term view. Milford Asset Management and Investors Mutual have both trimmed after strong runs, and Firetrail Investments described Santos as hostage to the on-again, off-again conflict. Antares Capital noted that the Pikka ramp-up has increased Santos's sensitivity to oil price movements.

More than an oil price trade

Several managers stress that the investment case does not depend on oil. First Samuel said in June that Santos continues to trade at a discount to its long-term valuation despite the manager's bearish outlook for long-term oil prices. “The appeal is not simply oil-price leverage,” First Samuel said, pointing to scarce, long-life LNG, oil and gas assets moving from construction to cash generation with a clearer commitment to shareholder returns. In March, it highlighted break-even operating cash flow at just $27.40 per barrel as protection in periods of low prices.

Managers repeatedly single out the LNG portfolio. Leithner & Company described PNG LNG, of which Santos is the largest owner at 39.9 per cent, as the jewel in Santos's crown, citing low production costs and the ability to roughly double capacity with the P'nyang field, and noted Santos has sold 80 to 90 per cent of its LNG under long and medium-term contracts. L1 Capital said an earlier bid from an ADNOC and Carlyle consortium at around $9 a share validated the strategic value of these LNG assets and confirmed the disconnect L1 has long seen between share price and intrinsic value. Airlie Funds Management described PNG LNG as a high-returning, unique asset that should generate strong cash flows throughout the cycle, and Pendal prefers Santos over Woodside within energy, citing a more favourable free cash flow outlook.

The next leg: Papua LNG, Alaska and the Beetaloo

The forward pipeline is now in focus. In September, Pendal reported a binding agreement for Santos to increase its stake in Papua LNG for US$189 million, part of a broader deal in which ExxonMobil took over from TotalEnergies as operator, with a final investment decision planned for the end of the calendar year. Pendal described Papua LNG as “a high-returning project for STO with limited capital required up front.” Pendal's investor day notes also highlighted expanding the Alaska development, where Santos announced the Quokka-1 oil discovery in April, and testing whether the Beetaloo Basin can be a scale and economic project.

A high-returning project for STO with limited capital required up front.

— Pendal Group, Newsletter, September 2026

Greencape Capital said in March it sees no evidence the market is willing to acknowledge the significant position Santos holds in the Beetaloo, and Leithner relayed chief executive Kevin Gallagher's description of the basin as a potential game-changer that could unlock opportunity in the Northern Territory on the scale the North West Shelf did for Western Australia.

What managers are watching next

The checklist is concrete: Papua LNG reaching a final investment decision by year end, Pikka and Barossa sustaining their stated capacity, the pace of de-gearing from the high end of the leverage range, and delivery of the 60 per cent-plus free cash flow return commitment. The Beetaloo appraisal is the longer-dated option. Equity Trustees Asset Management summarised the stage Santos has reached back in March: with Barossa complete and Alaska Phase 1 nearly done, Santos is entering a period of cash harvesting, and the manager expects shareholders to look for the returns that follow.