Santos (STO) Update

Submitted by Jim Thesiger on 1 May, 2008 - 23:44

Santos (STO) have a maintained $18 per share target price but they have returned to buy Medium Risk due to recent share price under performance from Australian stockmarket analysts Citi.

Santos Ltd: BG Bid for ORG…the Game for LNG is Hotting Up

Maintain $18/share Target Price — but due to recent share price underperformance return to a Buy Medium Risk.

BG Bid For ORG is Dilutive — BG is bidding 24x 2008 earnings for Origin against a current PE multiple for Santos of 14x. With BG’s PE of ~15x in 2008 and 2009, the deal will be dilutive. Strategically, it seems a pill that BG is prepared to swallow.

Fairview Field is Important to BG — Our analysis suggests that around 65% of the un-contracted csm molecules that BG are purchasing are situated in the Fairview field. On this basis Fairview could be worth ~$850M to BG, which is substantially more than they have paid for involvement with QGC. We conclude that access to Fairview is important to BG’s East Coast LNG strategy.

Deal Likely to Force STO to Consider BG — If BG is successful in acquiring Origin it would hold a 30% interest in the highly productive Fairview field. It seems increasingly likely that BG could have some involvement in STO’s LNG aspirations. This scenario further supports unitization and at least 2 LNG trains.

We Still Consider Unitization Likely — We have for some months considered it likely that consolidation and even project unitization could occur. We consider it likely all csm producers will benefit…more inside.

Santos Holds Strong Roma CSM Position — Santos holds around 30% (~1,300Pj) of its un-contracted csm reserves at Roma in productive acreage where it holds a 100% equity position. Further reserve upside likely.