New research: Santos shareholders better off with capital return strategy

The Australasian Centre for Corporate Responsibility​ (ACCR) has today published research showing Santos’ current capex heavy production growth strategy is not the optimal strategy to maximise shareholder returns, with a capital return strategy offering more value and less risk.

“Santos’ growth strategy: will it deliver for shareholders?” shows that the portfolio of oil and gas projects Santos is targeting for Final Investment Decision (FID) within the next two years appears to generate modest value for shareholders. The projects are the Papua LNG project, Narrabri gas project, and Dorado oil project.

A capital return strategy - share buybacks - offers higher value than delivering the portfolio of selected unsanctioned projects, with lower risk and fewer emissions.

• The total net present value (NPV) of the unsanctioned portfolio is a modest $803m, equivalent to just 5% of Santos’ market capitalisation; forecast capex is over $6b. ACCR estimates reallocating capital from these unsanctioned projects to share buybacks would generate an additional $730 million value. It’s estimated there’s an additional $1.7 billion upside available from ceasing fossil fuel developments because it would reduce costs and risk for the business.
• Analysis of 30 years of Santos’ shareholder returns shows production growth does not seem to have a positive correlation with shareholder returns.
• Shareholder returns have been significantly stronger when Santos is operating under a low-cost operating model.
• • In the low-cost operating phase (2016-2021) shareholder returns outperformed the MSCI World Energy Sector Index by 162%
  • In the current growth phase (2021-2023) capex more than doubled and returns lagged the MSCI World Energy Sector Index by 69%
• In 2023 Santos’ dividend and share buyback yield was 7.4% -  well below the 11% average of a peer group of nine Australian and global peers.

The three projects up for imminent FID all face a range of risks, and the portfolio as a whole is sensitive to the kind of cost overruns typically seen in Australia’s LNG sector.

Commenting on the research, Alex Hillman, Lead Analyst of the Australasian Centre for Corporate Responsibility (ACCR) said:

“Santos shareholders have been increasingly frustrated with the chronic share price underperformance, ineffective strategy and perverse executive bonuses.

“Following the collapse of the merger talks with Woodside, Santos’ board and management are still hunting around for a rabbit to pull out of their hat to try and fix the lagging share price, but a compelling vision seems absent.

“This report calls into question whether Santos’ production growth strategy will address the company’s share price woes.

“When you strip all the hype around the projects Santos is trying to develop and simply look at the figures, it is clear: growth and expansion are not in the interests of shareholders.

“Redirecting capex from these projects to share buybacks creates an additional $730 million value and ceasing all new projects presents a potential $1.7 billion further upside. This strategy warrants deep consideration by the Santos board.

“None of the projects Santos wants to reach FID on in the next two years are Paris-aligned or cost competitive compared to other unapproved oil and gas projects, raising their risk profile even further.”