Santos Q1 Capex Falls as Pikka Nears First Oil
Santos (ASX:STO) jumped 3.63% to close at A$7.71 on Thursday after delivering a quarterly update that may mark a turning point for the company. Revenue came in slightly below consensus, but investors quickly looked past the miss to focus on two things that really mattered: capital spending fell sharply, and management confirmed that first oil from the long-awaited Pikka project in Alaska is just weeks away. For a company that has spent years investing heavily in growth, this is exactly the setup investors have been waiting for. The market’s reaction made clear which story it cares about.
Pikka First Oil Just Weeks Away: The Catalyst Years in the Making
Pikka is Santos’ flagship oil project on Alaska’s North Slope, developed with partner Repsol. After years of construction and drilling, the project is now mechanically complete and in the final stages of commissioning. First oil is expected in the coming weeks, with full production of 80,000 barrels per day targeted for early in the third quarter.
This matters more than it might sound. Santos has always been a gas-heavy company, and Pikka adds a large, profitable oil stream to the mix just as oil prices push higher. It also sits alongside Barossa, a major LNG project that is just starting to ramp up. Together, these two projects are expected to lift group production by around 30% by 2027.
There was more good news from Alaska this quarter. A successful test at the nearby Quokka-1 well suggests the region could deliver growth well beyond Pikka alone. For investors, this strengthens the view that Alaska is a long-term cash engine, not a one-off bet.
Capex Down 29% as Investment Cycle Peaks
The second big story is money. Capital spending dropped 29% in the first quarter, the clearest sign yet that Santos is shifting from spending mode to earning mode. For years, the company has been pouring cash into Pikka and Barossa. Now, those projects are almost done, and the heavy spending is easing.
Even with commissioning work still underway, free cash flow held steady at around US$383 million for the quarter. Santos says it can stay cash-flow positive with oil prices between US$45 and US$50 per barrel. With Brent now trading near US$103 on the back of tightening supply and Middle East tensions, the company has plenty of margin to spare. Put simply, production is rising, spending is falling, and oil prices are firm. That combination is what usually drives energy stocks higher over time.
The Investor’s Takeaway
Santos shares are now up 25% year-to-date at A$7.71, giving a market cap of roughly A$25 billion. The market is clearly starting to price in the shift, and Thursday’s positive reaction despite a small revenue miss shows where investors’ focus really is. That said, the full story still has room to run if Pikka delivers on schedule.
Risks remain. Barossa has had some commissioning hiccups; Pikka could still slip in its final stages, and oil prices would likely fall if Middle East tensions ease. None of these looks like dealbreakers, but they are worth watching.
In our view, STO offers a compelling risk-reward over the next six months for investors comfortable with energy sector swings. After a 25% run, some patience may be rewarded, but those hoping for a deep pullback may not get one if Pikka starts up on time.
