Santos 3Q24 | Climate Transition Analysis

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Santos 3Q24 results

3Q24 results saw Santos experience a decline in production and revenue due to planned maintenance in WA, with earnings to be reported at the half and full year. Santos Energy Solutions (SES) capex fell 15% to $41m, while upstream rose 11% to $668m, both driven by WA projects, with no change to 2024 guidance.

Injection at Moomba CCS has begun, with a capacity of 1.7 Mtpa and a target to capture 250,000 tonnes in FY24, marking the launch of Santos Energy Solutions’ first offering beyond midstream processing. While smaller in size, Santos has CCS ambitions comparable to European majors, targeting 10 Mtpa of storage by FY30.

The annual Investor Briefing Day is scheduled for Tuesday, 19 November.

Our view

Santos solely relies on CCS technologies as a revenue source for its low-carbon offerings. With the first phase of Moomba CCS complete, the company has yet to indicate earnings investors can expect from the provision of CCS as a service and the sale of generated ACCUs.

Investors engaging with Santos should ask for:

1) Quantification of levers to decarbonise:

• What alternative transition strategies will Santos pursue if it cannot establish a viable business case for fossil-based fuels like synthetic methane and CCS as a service? Given these solutions are central to Santos’ strategy, what is the contingency plan if they fail to scale commercially or meet emissions targets?

• Will Santos commit to aligning emissions reporting with its financial year to improve clarity? The current July-June emissions reporting cycle creates misalignment with calendar year financials, hindering consistent analysis.

2) Increases in low-carbon investment:

• Can Santos quantify the total cost, earnings potential, and emissions implications of producing synthetic methane and offering carbon capture services? Investors need clarity on whether these initiatives justify investment and align with long-term decarbonisation goals.

• What measures will Santos take to monitor and manage potential liabilities if the Moomba CCS project underperforms? Given that the project is expected to capture emissions from external sources, what safeguards are in place should it fail to deliver the intended results?

Key takeaways

• 01 CCS strategy kicks off. How will this contribute to earnings?

  3Q24 saw the successful commissioning of Moomba CO2 injection, achieving 1.7Mtpa nameplate capacity. 

  The company expects 250,000 tonnes in FY24 and a long-term storage potential of up to 20 Mtpa. The lifecycle cost is now at <$30/tCO2, revised up from $24/tCO2. Over the next year, the effectiveness of Moomba will be critical in proving Santos’ capability to deliver large-scale CO2 storage service at a low cost.

  Bayu-Undan CCS FEED is 90% complete, with focus shifting to regulatory agreements with Timor Leste and Australia, and commercial agreements to be FID-ready.

  Santos does not report revenue for SES business quarterly, which is currently driven by midstream activities. With Moomba CCS operational and Bayu-Undan approaching FEED completion, we would like to see a breakdown of revenue for SES, including a distinction between CCS and midstream services in 4Q24. 

  Despite being significantly smaller in size, Santos’s CCS ambitions are in line with European majors, with the company guiding to 10 Mtpa of storage by 2030. 

  On e-methane, a joint agreement was signed with Japanese customers to undertake studies on e-methane utilising imported CO2 in the Cooper Basin. More information is needed on requirements for commercial viability and returns.

• 02 Low-carbon capex unmoving. What’s next?

  With Moomba now operational, its unclear where low-carbon capex will be directed next.
  
  Low-carbon capex was $41m down 15% on 3Q23. This drop was due to reduced capex in WA where the Reindeer CCS project is still in FEED stage. On the other hand, upstream capex was up 11% on 3Q23 to $668m, with capex in WA being the main driver for the increase (+267% on 2Q23). There was no change to 2024 capital expenditure guidance.

  As of 1H24, Santos’ invested 5% of capex in Energy Solutions.This will need to rise to an annual average of 24% between FY24-FY33, to meet Santos’ $3-4.5bn cumulative capex ambition. With Bayu-undan at 90%, more information on lifecycle cost is needed, given the upward revision to Moomba. 

• 03 Production down, outlook upgraded.

  Production fell 7% from 3Q23 to 21.6 M boe due to planned maintenance activities on Varanus Island in WA. This coincided with revenue falling 12% from 3Q23 to $1.3bn. Despite this, Santos expect production volumes to be in the top half of the guidance range in 2024 (implying 87-90 Mboe).

  Company free cash flow was down 15% to $400m, but recovered 6% from last quarter - the lowest reported in the trailing 2-years at $377m.