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While Santos Ltd (ASX:STO) shares haven't delivered outstanding returns over the past year, they've notably outperformed their energy sector rivals, Woodside Energy Group Ltd (ASX:WDS) and Beach Energy Ltd (ASX:BPT). All three companies, part of the S&P/ASX 200 Index (ASX:XJO), have been under pressure due to slumping oil and gas prices, compounded by their individual challenges.
As of yesterday’s close, Woodside shares have dropped 17% in 2024, while Beach Energy shares have declined by 21%. In comparison, Santos' 3% year-to-date decline seems relatively minor. Adding to the appeal, Santos offers an unfranked 6.2% dividend yield, split between trailing and pending dividends, providing an attractive income stream for investors.
Revenue Down, Dividends Up: A Mixed Bag for Santos
Santos reported its half-year results on Wednesday, showing a 9% year-on-year decline in sales revenue, bringing it down to US$2.7 billion. Production also saw a slight decrease, down 2% to 44 million barrels of oil equivalent (mmboe). Despite these declines, the company rewarded its shareholders with a record interim dividend of 13 US cents per share, marking a 49% increase from the previous interim dividend.
On the project development front, the Barossa Gas Project, a key initiative for Santos, is nearing 80% completion, with first gas expected by the third quarter of 2025. CEO Kevin Gallagher expressed optimism about the project, noting that initial results from the third well indicate excellent reservoir quality and thickness. Once fully operational, Barossa is expected to add approximately 1.8 million tonnes per annum (Mtpa) to Santos' expanding LNG portfolio, potentially providing significant long-term benefits for the company.
Moody's Perspective on Santos' Financial Health
Following the release of Santos' half-year results, Saranga Ranasinghe, a senior analyst at Moody's Ratings, provided an assessment of the company’s performance and outlook. Ranasinghe noted that Santos' results for the six months ended June 2024 were in line with Moody’s expectations, highlighting the company's strong operating profile and ability to maintain relatively low-cost production despite inflationary pressures.
Ranasinghe acknowledged that while Santos' earnings and cash flow have declined due to lower production and falling LNG prices, the company's leverage metrics remain within Moody’s rating thresholds. This stability is crucial, especially given the high capital expenditure expected over the next 12 months.
Moody's also commented on the Barossa project, noting its importance to Santos' future. While the project is on track for first gas production in late 2025, Ranasinghe emphasized that Moody's will continue to monitor progress, particularly for any potential delays or budget overruns.
Strong Liquidity and a Stable Balance Sheet
Ranasinghe praised Santos' liquidity, describing it as "excellent." Moody's expects Santos to effectively manage shareholder returns, growth spending, and its equity positions in projects in a manner that preserves its credit profile. This positive assessment of Santos' financial health bodes well for the company's ability to navigate the challenging energy market and deliver value to shareholders.
