Joseph Taylor: Hi Mark, we’re here to talk about Santos (ASX: STO) today. They recently updated investors on their two big growth projects, Barossa and Pikka. What's the progress looking like and what impact could these projects have?

Mark Taylor: Well pleasingly they're both progressing according to plan. Barossa is about 43% owned, a US$5.3 billion project. So, pleasing that it is tracking to plan. It'll add about 17 million barrels of oil equivalent, which is a near 20% increment to Santos's current production levels. And it's worth about $1.25 of our fair value estimate, so about 10% of our fair value. So quite important that it gets up and running. It's going to feed the existing Darwin LNG facilities and it's a replacement to the Bayu-Undan gas that's now depleted. The depletion of that field sort of left a 15 million barrel hole in Santos's production profile. So, it'll be good when it gets back up and running.

J Taylor: That sounds important. And Pikka, the other project?

M Taylor: It's 51% owned. It's a US$2.6 billion project. It's also tracking to plan about 56% complete. It's worth about $0.80 per share or 6% of our fair value estimate. The beauty of Pikka, of course, is it will have sort of prolific upfront oil flows and oil revenues generally more lucrative than gas. They are higher margin. So, it'll be very good for cash flows.

J Taylor: So, your forecast for Santos's earnings going forward is partly based on those projects coming online, but it's also based on quite a robust demand outlook for natural gas. Where's your confidence coming from there?

M Taylor: Right. Well, I mean, you've got to remember that while we are expecting production growth through these new projects coming on, our overall view is that energy prices are going to come off. So, Brent crude currently is about $80 a barrel. We've got it coming back to about $60 a barrel by 2026. And other energy prices tend to move in sympathy with Brent. So, you know, we are expecting a softening in prices. That said, you are right, we have a fairly robust outlook for gas demand. And that basically rests on the energy transition. Gas is the fastest, cheapest, most reliable way to reduce carbon emissions, has half the carbon intensity of coal. It's lower carbon intensity than oil. It's also a brilliant either peak or base load source for power generation. So, when the sun's not shining or the wind's not blowing, it's the first port of call in terms of smoothing out power generation. But even that aside, just the background of growing demand for power through electrification of transport is going to see a really fair tailwind for natural gas just because development of renewables won't be able to keep pace with demand initially and so gas will be filling that void.

J Taylor: You mentioned that you expect prices for both commodities to fall off a little bit. To what extent are Santos' profits impacted by changes in oil and gas prices?

M Taylor: It's pretty much everything, especially when you consider that a big proportion of their cost is either wellhead royalties or profit taxes, which are directly linked to the oil and gas prices. Having said that, other things that could change their fortunes, I guess, final investment decisions on still more projects, and one of those that we're looking forward to is the Dorado project, which is another oil project. Santos has a large stake in that, and if approved, could be a pretty prolific oil producer, and that could also improve their fortunes as well.

J Taylor: Great. You spoke a little bit earlier about the difference between export pricing and domestic pricing. Could you maybe explain that for our audience?

M Taylor: Well, I mean, quite straightforward really in the sense that export price is exactly what it sounds like. It's the price that you get for your exported product, whereas the domestic price is the price you get for your domestic product. However, these things can be quite different depending on the circumstances. For a long time, the oil price has been in the domestic scene pretty much just equivalent to what the export price was and that's because oil is readily exportable. Natural gas, on the other hand, is not as easy to export economically. Australia, for a long time, was a stranded market. It had no means with which to export gas. The supply demand characteristics in the domestic market were what set the price. We had pretty low gas prices of the order of $2.50 or something like that for a long time. That was till the advent of LNG exports, particularly on the east coast of Australia in Queensland. What that does is it allows domestic producers to sell their product at an export price, very healthy prices as it happens, because selling chiefly into Asia, which is short natural gas. It's a healthy market. That effectively ensures the export price to the domestic market. Since those LNG projects have been commissioned, we've had much higher domestic gas prices.

J Taylor: You mentioned that your fair value for the stock is quite a bit higher than the current market price. What could close that gap going forward?

M Taylor: All else equal, it would be things like the Barossa project, Pikka project, commissioning on time and to budget. That would be the sort of thing that would cement the market's thoughts around Santos as a quality stock. Outside of that, the obvious things are higher oil and gas prices. If you've got another spike in those, that would do it. It could be things like an equity sell down in a particular project. If that was done at a healthy price, that might remind the market that there's value in the stock that's not currently being recognized. In the same vein, it could be a takeover bid. That's the sort of thing that could come from left field that could instill recognition of value in the stock that's not currently being appreciated.

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