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Are Santos Ltd shares a buy after its investor update?

Credit: drpepperscott

The Santos Ltd (ASX: STO) share price will be one to watch on Thursday after the energy giant released its investor day presentation ahead of the event.

What was in today’s investor update?

According to the release, Santos has confirmed that 2017 production and sales volumes are on course to hit the upper-end of its guidance range of between 58 and 60 million barrels of oil equivalents (mmboe) and 79 and 82 mmboe, respectively.

Elsewhere, all other guidance, including capital expenditure of US$700-750 million, have been maintained. However, capital expenditure will increase reasonably significantly in 2018 to the range of US$825 to US$875 million. This is due to its plan to increase drilling activity in both the Cooper Basin and GLNG in order to grow production and increase gas supply for the domestic market.

Despite this sizeable increase in capital expenditure the company still expects to maintain a free cash flow breakeven in 2018 within the US$35-40/bbl target range.

One slight disappointment is that although production at all five core assets is expected to increase next year, this is likely to be offset by natural field decline in its non-core assets. As a result, production guidance for 2018 is flat at between 55 and 60 mmboe. Sales volumes are forecast to be in the range of 72-78 mmboe.

But with oil prices tipped to rise towards the US$70 a barrel mark in 2018, Santos could still enjoy bumper profit growth and strong free cash flow generation in FY 2018 even with flat production and lower sales volmes.

Should you invest?

I think Santos is a great option for investors in the resources sector, especially given the improved outlook for oil prices.

If oil prices remain at these levels into 2018 and beyond then I expect Santos to generate significant free cash flow that allows it to continue to pay down debt and consider resuming its dividend. For this reason I would choose it above Woodside Petroleum Limited (ASX: WPL) and Oil Search Limited (ASX: OSH).

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