No merger, no worries. Santos shareholders have a wall of free cash flow coming their way

It has been a tough couple of weeks for Santos (ASX: STO) shareholders. On 7 February, Santos and Woodside called off talks on an $80 billion merger. The share price tumbled 6% on the day and hasn't moved higher since. 

Today, the company saw underlying NPAT fall 42% due to weaker oil and gas prices. It's not all bad news, however, with the faithful rewarded with a 16% jump in the final dividend, which came in at US17.5 cents per share.  

For Aaron Binsted from Lazard Asset Management, he's not overly concerned with the latest numbers, nor the breakdown of merger talks. 

"Santos and Woodside both look good. Maybe something could have been done with them as a pair, but I think they both have bright futures ahead of them as standalone entities", said Binsted.

In the following, Binsted explains why his views on Santos remain bullish and shares his outlook for the broader market over the year ahead. 

Key full-year results

• Underlying NPAT $1.423 billion (down 42%) vs expectations of $1.47 billion
• Revenue from ordinary activities $5.89 billion vs expectations of $6.10 billion 
• Final Dividend 17.5cps (+16%); Record 27-Feb, payable 27-March

For more information and market data on Santos head to Market Index.

Note: This interview took place on Wednesday, 21 February 2024.

1. In one sentence, what was the key takeaway from this result?

The key takeaway is that the major growth projects are de-risked and if you look out to 2026 and beyond, shareholders are going to have a wall of free cash flow coming towards them.

2. Were there any major surprises in this result that you think investors should be aware of?

On a headline level the result was a very modest miss but the biggest surprise is probably the dividend. It's about 30% higher than consensus expectations.

3. Would you buy, hold, or sell this stock on the back of this result?

Rating: BUY

Santos is a buy. 

4. What’s your outlook on this stock and the sector over the year ahead? Are there any risks investors should be aware of?

We're really positive on Santos and we are positive on LNG. 

Just to look at the backdrop, China's building more gas-fired power plants over the next two years than 100% of the UK, and volumes are going to grow 50%, to 2040. So it's a structural growth market. That's a really nice backdrop for Santos who has privileged assets close to end markets. 

The clear risk is the commodity price cycle but the good news is Santos has a good balance sheet, so the low price environments are not a big concern and it means that shareholders really can benefit with excess cash flows when you see those higher price periods.

5. From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or cautious?

Rating: 2.5

I'd say two and a half. On our numbers, it's basically in line with long-run levels, which means on a medium to long-term view, i.e. five years plus, you should be thinking about 10% nominal returns per annum - which is fine. So, happy to hold the market, don't need to get too worried.

At the same time, this is not one of those one-in-ten years where you're going to get a really high return. So we think it looks fine.

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