Santos is looking attractive after a material reduction in balance sheet risk. With shares trading at nearly AUD 3.66, we believe investors are offered 44.8% potential upside. Capital expenditures now run at largely a maintenance level, and we forecast free cash flow to exceed AUD 1.0 billion by the end of 2021—sufficient to expunge net debt in that year all else being equal, including reinstatement of a 40% payout ratio from 2018. Santos is currently paying no dividends. Net debt/EBITDA stood at 2.9 in 2016, down from 4.1 a year earlier, with a reduced net debt load of AUD 4.3 billion because of the AUD 1.0 billion institutional placement in December. In conjunction with improved oil prices, we project net debt/EBITDA of just 1.5 in 2017, eminently manageable.
We applaud Santos’ focus on supporting five core, low-cost/long-life natural gas assets, all with significant upside potential. The refreshed management team is making good on promises for cash-generative restructuring. Upstream unit costs in 2016 fell 18% to USD 8.50 per barrel, restructuring that includes a 580-person reduction in its workforce, leaving operations free-cash-flow positive at oil prices above USD 36.50 per barrel. This is 22% below 2015’s USD47 figure and not far above Woodside’s commendable USD35 mark.