Commodities | Jan 29 2025
The key highlights from Santos' quarterly report were upgraded guidance and progress on two major projects the company will complete before switching focus to shareholder returns over growth.
-Santos' 2025 production guidance upgraded, costs reduced
-Barossa gas and Pikka oil are on-track
-Dorado gas delayed, for now
-Increased dividends ahead for loyal shareholders
By Greg Peel
Santos' ((STO)) strategy day last November excited brokers, underscoring across-the-board Buy or equivalent ratings. In recent times, noted Morgans at the time, a key point of differentiation between Santos and its larger local peer Woodside Energy ((WDS)) has been that Santos held a stronger growth profile, while Woodside enjoyed better earnings quality from its concentrated portfolio of high-quality assets.
The strategy day outlined that was about to change.
The focus of the 2024 annual investor briefing was the planned introduction of a new capital framework that would slow growth and increase shareholder returns. Macquarie described it as a simplified and more disciplined framework, while Morgan Stanley saw the shift as positive, improving comparability and signalling smoother returns from Santos' growth profile.
The new framework will apply from the second half of 2026 when growth projects are commissioned at Barossa gas (offshore Northern Territory) in the September quarter 2025 and Pikka oil (Alaska) in the first half of 2026. The new framework will return more cash to shareholders than the current policy and confirms Santos will prioritise shareholder returns over committing to its available growth opportunities, including Papua LNG, backfill opportunities into PNG LNG, Dorado (offshore WA), Narrabri (NSW) & Beetaloo (offshore NT).
Last week, Santos released its December quarter production and sales numbers. Analysts are once again excited, albeit not so much by the quarterly performance, which was largely in line with expectation, but by the progress being made at Barossa and Pikka.
Upgraded Guidance
Santos reported a quarterly result in line with consensus expectations, albeit with sales revenues ahead due to stronger realised LNG pricing. The company released 2025 guidance, providing a positive outlook for 2025, with the midpoint of production guidance 4.5% ahead of consensus and the midpoint of unit production cost guidance -10% below.
The expected start of production from the Barossa field in the upcoming September quarter underpins the upgraded production guidance for 90-97 million barrels of oil equivalent (mmboe) this year, which compares with previous market expectations of 90mmboe.
Meanwhile, the inclusion of Barossa volumes is the primary driver of the guidance for lower unit operating costs. Guidance is for US$7.0-7.50 per barrel of equivalent (boe), compared with a prior consensus estimate of US$7.90 along with some older higher-cost projects reaching the end of their productive life.
The Barossa project was 88.3% complete at the end of December 2024, with drilling underway at the fourth and fifth production wells. Drilling results to date have been in line to ahead of expectations. The project remains on track versus the current budget and is still tracking to first gas production in the September quarter.
Given how difficult this project has been for Santos (permitting, and legal challenges from climate activist-backed groups), Macquarie believes first LNG is particularly significant.
Pikka is also progressing but it's too soon to know if first oil flow will be this year, Jarden suggests. No formal update on timing was provided but management commentary stated "strong progress was achieved to date" in relation to winter season pipelay activities. Pipeline installation is on the critical path for the project and early completion could allow first oil to commence as soon as December, although management had targeted mid-2026.
Goldman Sachs continues to assume start-up in the June quarter 2026, slightly ahead of management expectations, reaching nameplate capacity in the September quarter.
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