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ASX:STO
Santos Ltd
Investment Summary
The fund managers believe that Santos Ltd is an undervalued asset in the oil and gas sector. They highlight a significant valuation discount compared to its peers, with the current market recognising only a fraction of its potential. The managers urge a structural separation of Santos' LNG assets to unlock this value, noting that a standalone LNGCo could exceed A$10.50 per share, representing a potential 43% upside. They assert that recent discussions for a merger with Woodside illustrate the strategic value of Santos’ assets, but caution against low-premium mergers that may not serve shareholders' interests. The fund managers assert that Santos has strong growth prospects, particularly in the Barossa and Pikka projects, that could enhance its cash flow profile significantly by 2026. They emphasize the need for the board to explore options to better reflect the company's intrinsic value and attract investor interest.
Commentary From The Managers
L1 Capital
31 Mar 2024
$7.84
- L1 Capital emphasizes the structural separation of Santos’ LNG assets to enhance shareholder value.
- Energy market fundamentals remain robust, supporting this strategic approach.
- Engagement with senior management and institutional shareholders indicates wider support for a review of structural solutions.
- Encouraging communications from CEO Kevin Gallagher signal ongoing examination of options.
- Resolution of Barossa legal challenges has derisked the LNG project, enhancing its viability.
- Significant global M&A activity in the sector suggests Santos’ LNG portfolio is an attractive target.
- The failed merger discussions with Woodside highlight opportunities for better outcomes, favoring a structural solution over a low-premium merger.
- L1 Capital believes Santos has multiple catalysts driving potential shareholder value appreciation.
- Analysis suggests substantial upside based on a sum-of-the-parts valuation.
L1 Capital
28 Feb 2024
$7.09
- Santos (Long -10%) underperformed after preliminary merger discussions with Woodside ended without a deal.
- The company reinforced its commitment to reviewing options to unlock shareholder value.
- L1 Capital sees Santos’ asset base as materially undervalued by the market.
- Attractive structural options to unlock value exist, independent of any third-party transactions.
- Progress on key growth initiatives includes the Barossa project, nearly 70% complete, on track for first production in 2025.
- The Pikka project is also progressing well, currently nearly 40% complete.
- Santos is anticipated to possess one of the most attractive cash flow profiles globally in the sector by 2026, coinciding with the completion of both major projects.
L1 Capital
31 Dec 2023
$7.68
- Santos (Long +10%) outperformed despite a weak oil price environment (WTI -5.7% in December).
- Announcement of preliminary discussions regarding a potential merger with Woodside.
- Reviewing a range of alternative structural options to unlock value in Santos.
- Recent developments reflect L1 Capital’s core investment thesis that the company's asset base is materially undervalued by the market.
- Structural options such as demerger and asset sales should be explored to close the valuation gap.
- Details of these options were discussed in L1 Capital's September 2023 quarterly report.
L1 Capital
31 Dec 2023
$7.68
- Santos' share price performance has lagged significantly behind global peers over the past three years.
- The company trades at a large discount compared to U.S. peers, despite having a stronger EBITDA growth profile.
- L1 Capital believes that Santos' asset base is materially undervalued by the market.
- Structural options, such as demergers and asset sales, should be explored to close the valuation gap.
- On December 7, 2023, Santos announced preliminary discussions for a potential merger with Woodside.
- Santos is also examining a range of alternative structural options for unlocking value.
- L1 Capital welcomes the willingness of the Santos Board to engage with Woodside, indicating an openness to explore options for unlocking shareholder value.
L1 Capital
30 Sept 2023
$7.87
- L1 Capital continues to hold its investment in Santos due to a portfolio of quality long-life assets and attractive valuation in an elevated oil price environment.
- Santos’ share price has lagged behind its peers despite strong operational execution by CEO Kevin Gallagher.
- Over the last three years, Santos’ total shareholder return has been the lowest among its peer group.
- This poor performance is attributed to regulatory overhangs, smaller capital returns, a disparate growth strategy, and an under-appreciated LNG-focused equity story.
- L1 Capital believes a structural separation of Santos’ LNG assets would unlock inherent value and create significant outcomes for shareholders.
- Proposes a demerger of Santos’ Australian oil and gas assets and Alaskan oil assets to create an LNG-focused company.
- Estimates a sum-of-the-parts valuation of more than A$10.50 per share, indicating a potential ~43% upside from the current share price of A$7.35.
- Santos trades at a discounted valuation despite strong EBITDA growth outlook and high-quality growth profiles of projects like Pikka and Barossa.
- Rationale for the structural separation:
- Unlock valuation discount, potentially exceeding the current market capitalization.
- Enhanced management focus on project execution and governance.
- Improved capital allocation tailored to asset characteristics.
- Attractive standalone equity stories for diverse investor bases.
- Significant strategic appeal with assets that support strong valuation.
- Potential tax advantages and eligibility for ASX 100 index inclusion post-demerger.
- The proposed LNG company (LNGCo) to be a leading global LNG pure-play, expected to generate substantial cash flow.
- LNGCo's growth profile bolstered by projects like Barossa and improving market conditions for LNG.
- DemergerCo positioned as an Australian domestic gas champion with growth opportunities in tightening markets.
- Demonstrates a strong free cash flow yield potential, particularly post-Pikka project commencement in 2026.
- Conservative balance sheet positioning for growth with a focus on debt capacity to fund projects.
Please note: The completeness, accuracy or current status of the investments referenced are not guaranteed.
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