Santos (STO) Company Stock Update

Santos (STO) rating reduced to Neutral from Buy and has a 12-month share price target of $23.62 (prior $26.59) from Australian market analyst UBS.

Santos (STO) Cooper Oil and Varanus Island Update

Event: Cooper Oil outlook and Varanus Island incident:

We have reviewed our Cooper oil forecasts and have reduced our outlook for Santos from this project. We also now assume no gas production takes place from Varanus Island until early August, after which full John Brookes (STO 45%) production is restored.

Impact: EPS fcsts reduced by '08: 6.3%, '09: 24% and '10: 33%:

The revision to our Cooper oil outlook has been the main driver behind our '08 '09 and '10 EPS forecast reductions by 6.3%, 24% and 33% respectively. The Varanus Island incident is also expected to remove around 2 months of John Brookes gas / condensate production.

Action: Rating reduced to Neutral from Buy:

Although we have lowered our earnings forecasts for Santos and now reduce our rating to Neutral (previously Buy), we also continue to see upside from the future go ahead and potential expansion of the Santos operated Gladstone LNG and ExxonMobil led PNG Projects. Vietnam exploration also offers near term upside potential.

Valuation: NAV $15.33 (prior $18.30)

Our NAV estimate is based on a DCF (using a 10% nominal discount rate) of forecast cash flows over the 2P reserve life of producing assets and committed projects. Our 12-month share price target is now $23.62 (prior $26.59) and is based on our NAV estimate, plus potential projects (including Gladstone LNG and PNG LNG) and exploration upside.