Fundie banks on strong earnings, ESG targets for fossil fuel producer

As with all good stock pickers, Romano Sala Tenna has a preference for high-quality management – an attribute he believes oil and gas producer Santos possesses, stating it has “one of the top management teams in the energy sector”.

The company’s strategic acquisition of Oil Search before the oil price took off, as well as its successful cost cutting and diversification, should be taken as proof of its capability, the Katana Asset Management Portfolio Manager said during his appearance on Reach Markets’ Meet the Fund Manager session in May.

Its price-to-earnings (P/E) ratio of 6.8x at the time was one that Mr Sala Tenna believed was extremely undervalued, and even though it sits at 9.25x now, it’s still well below the industry average of 12.4x.

Santos delivered record production, free cash flow (FCF) and underlying earnings during H1 CY22. Sales revenue was up 85% to US$3.766 billion, FCF was up 199% to US$1.708 billion and underlying profit was up 300% to US$1.267 billion.

These results were largely driven by higher commodity prices and strong customer demand, which is expected to continue throughout the rest of H2 CY22.

Santos seems to have a keen eye for exploration projects. Comet Ridge (ASX: COI) has current reserve estimates of 186 petajoules (PJ) in 2P and 321 PJ in 3P for the Mahalo Gas Project, and Santos has been steadily converting its $13.5 million debt lent to COI into equity in the project as it advances.

By 2039, there could be demand of 4.57x available supply of gas on the east coast of Australia – and that is if all development-ready reserves are brought into production.

One of the few negatives that Mr Sala Tenna pointed out was Santos’s gearing being at the top of the range, which at the time sat at 26%. Since then, in the six months to June 2022, the company has managed to reduce its debt by US$1 billion – resulting in a rapid de-gearing to 22.5%.

Santos has maintained its investment-grade credit rating of ‘stable’ with S&P (BBB), Fitch (BBB) and Moody’s (Baa3). STO has US$5.415 billion in available liquidity split between US$3.35 billion in cash and US$2.065 billion in undrawn debt, and in August 2022 the company reported that its syndicated debt refinancing was well progressed with a net debt position of US$4.151 billion, with no significant debt maturities until 2027.

On the ESG front, Mr Sala Tenna said Santos has been “one of the global leaders in the energy sector”. He noted its carbon credit program, which endeavours to become not only carbon credit neutral, but carbon credit negative.

The Portfolio Manager said that through a combination of blue hydrogen and carbon storage basins, the company is on track to be sequestering more carbon from the atmosphere than it is emitting through production of its fossil fuels.

Click here to view more videos from Romano Sala Tenna’s The Insider: Meet the Fund Manager session.

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