Analysts are wary on the timing of Santos’s stalled Barossa gas project
Santos is still factoring in a restart to drilling at its large Barossa gas project by the end of this year, but analysts are not so sure.
Citigroup analysts are only factoring in half the value of Santos’s Barossa offshore gas project into their modelling on the company, saying they’ll only upgrade this assessment once it is certain the project can be finalised.
Santos, in its quarterly report released on Thursday, said it continued to have a rig stationed off the coast of Darwin while it secured the requisite approvals to restart drilling at Barossa.
Drilling was halted in September last year after Tiwi Island traditional owner Dennis Tipakalippa won a Federal Court case that found Santos had failed to adequately consult traditional owners, bringing its drilling activities to a halt.
Santos said on Thursday that “Assuming regulatory approval ... is obtained, there is potential for drilling activities to recommence before the end of the year’’.
Citigroup said this timeline was “later than the mid-year expectation in financial markets in our view’’.
“However, there is no change to capex guidance for calendar year 2023 yet, so we infer this to mean Santos doesn’t yet have clarity on timing for environmental approvals to give confidence on providing updated guidance,’’ Citigroup said.
“We continue to factor in only 50 per cent of the net present value for the project in our sum of the parts valuation.
“We can only factor in a higher percentage when we feel comfortable enough that the project can complete, including no future court challenges. We assume an 18-month delay to first gas.’’
Santos, which owns half of the Barossa project with South Korea’s SK E&S holding a 37.5 per cent stake and Japan’s JERA 12.5 per cent, said assuming that drilling restarted before the end of this year and that the gas export pipeline is also installed this year, “the Barossa project remains on target to commence production in the first half 2025 and within current cost guidance’’.
Citigroup has a $7.75 price target for Santos against the current price of $7.08, while RBC Capital Markets is more bullish with a $9 target.
“All Santos major projects appear broadly on track, although Barossa and Narrabri continue to face a challenging approval process,’’ RBC said.
“We think delivering (the Barossa first half 2025) target is getting riskier because it is dependent on installing the gas export pipeline in 2023 and recommencing drilling by the end of 2023.’’
Santos’s first quarter production fell 15 per cent against the same period last year to 22.2 million barrels of oil equivalent (mmboe) and sales revenue fell 14 per cent to $US1.63bn.
“First quarter production in 2023 was 13 per cent lower than the fourth quarter (of 2022) primarily due to lower domestic gas volumes in Western Australia, offset by higher volumes from the end of life Bayu-Undan field which is anticipated to cease production around mid-2023,’’ Santos said.
The average realised oil price was $US87.59 per barrel, down from $US113.09 for the same period last year.
Santos maintained its full year production guidance at 89-95mmboe.