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Stock of the week

Provided by Aspect Huntley

Santos Limited (STO)

Recommendations

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Investment ratings

STO is a major Australian oil and gas exploration and production company with interests in all Australian hydrocarbon provinces, Indonesia, PNG and North Africa. Reliance on declining Cooper Basin assets and years of exploration inactivity saw STO under production pressure. Stronger energy prices supported earnings. The requirement for a replacement cornerstone asset looks to be coal seam gas (acquired under former MD Ellice-Flint) and associated proposed LNG development. STO is a higher risk, lower quality proposition than rival Woodside, despite a solid balance sheet. The Sidoarjo mud disaster in Indonesia adds environmental liability uncertainty. Removal of the archaic shareholder cap lends price support.

Recent Analysis

Group 3Q09 production rose 4% to 13.9mmboe, in line with expectations. Revenue jumped 15% to $557m, lower than anticipated due to the higher proportion of gas sales. It was the first revenue rise in five quarters, oil price assisting. Gas volumes increased 6% to 71.3PJ or 80% of total and higher than expected. Production from the John Brookes field at 13.5PJ was significantly higher, still improving following lasting effects of the Varanus Island fire. Oil and condensate sales increased 9% to 2.9mmbls, 19% of total, though below expectations. Mutineer-Exeter oil production jumped six-fold to 0.34mmbls following repairs in 2Q. But key Cooper Basin output of 0.86mmbls was 6% lower due to natural field decline as was the contribution from Indonesia including the sale of Kakap.

Previous close	52 week high	52 week low
$14.94	$17.96	$10.90
Sector
Energy
Market cap
$12,415 Million

Total shareholder return (avg annual rate)
1yr	3yr	5yr	10yr
10.1%	19.8%	16.6%	20.1%

Earnings and dividends forecast (cents per share)
	2009	2010	2011
EPS (c)	91.7	40.0	58.0
PE Ratio (x)	16.3	37.4	25.8
DPS (c)	38.8	42.0	45.1
Div Yield (%)	2.6	2.8	3.0

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