Australia | Jul 27 2007
By Chris Shaw
Santos (STO) has delivered a better than expected June quarter production result but the FNArena database continues to show opinions are divided on the company’s outlook given question marks over its growth options in coming years.
Citi is on the Buy side of the ledger, the broker suggesting the company is continuing to deliver in terms of production and earnings are only suffering because the Australian dollar was stronger during the period.
It also sees some exploration upside given the company will drill a combination of low risk and higher risk wells in coming months that should deliver some positive results. Finally, the broker sees the potential removal of the current shareholder restrictions as putting the stock in play given it has an open share register and good leverage to stronger gas prices.
It is this leverage to potentially stronger gas prices that also has Merrill Lynch on the positive side as the broker notes the quarterly showed production volumes will meet guidance but earnings will be negatively impacted by the Australian dollar’s strength.
Credit Suisse is a non-believer though and sums up the case for the naysayers by pointing out the company’s production profile over the next couple of years is flat while margins are likely to come under some pressure from rising costs.
At the same time it sees a lack of growth in the company as potential new projects have not delivered any significant upside surprises, meaning the stock is trading cum an acquisition in its view
Assuming one is made the broker suggests it would need to be earnings accretive from day one for current valuations to be justified. To highlight this the broker notes its valuation on the stock of $10.23 is a more than 25% discount to the current share price. In its view this implies the market is valuing the stock on the basis of a break-up or takeover, but as these are speculative outcomes such a basis is not justified.
GSJB Were’s assessment of value is even tougher, the broker suggesting $9.95 is appropriate and so the stock can be nothing but a Sell given the lack of clear growth options and the premium on which it currently trades.
JP Morgan agrees and also sees the company as relatively expensive compared to its sector peers, particularly as there are a number of LNG projects that appear to offer better value than the company’s proposed Gladstone and Caldita/Barossa projects.
The broker also doesn’t see why some in the market are factoring in expectations for higher future gas prices along Australia’s east coast as in its view supplies are ample and prices should therefore remain reasonable.
It also points out the company’s Cooper Basin operations continue to fall short of expectations given timing issues and poor weather, so even though management has retained production guidance for the full year there is some scope for a negative surprise unless the company can lift its performance in the region.
With a range of views it is no surprise there are a range of earnings forecasts for the company, with GSJB Were one of the low markers with earnings per share estimates of 85.6c this year, 60.9c in 2008 and 59.2c in 2009, which compares to the more aggressive numbers put forth by Citi of 122.8c, 131.1c and 135.9c respectively.
According to Thomson One Analytics the median earnings per share forecasts for the company are 93c, 77c and 75c, while JP Morgan notes its estimates of 72.1c, 72.5c and 102.9c reflect increases of 10% next year and 8% in 2009 on the back of increases to its oil price forecasts. If not for upgrades to its oil price expectations the broker notes its forecasts for both years would have been relatively unchanged.
The FNArena database shows the stock is rated as Buy twice, Hold four times and Sell four times, with an average price target of $12.80, up from around $12.40 prior to the production result. The median price target according to Thomson One is $11.35.
Shares in Santos today are down sharply as the overall market has fallen heavily and at 1.30pm the stock was trading 3.4% or 47c lower at $13.37.