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Date : 14/11/2023

Santos Ltd (ASX: STO): A Strategic Pivot Towards Global Energy Leadership

Santos Ltd (ASX: STO), an Australian energy pioneer, has been navigating the tumultuous waters of the global oil and gas market for over six decades. With a rich history dating back to 1954, Santos has grown its footprint far beyond the Australian outback, cultivating a diverse portfolio that includes ventures in East Timor, Papua New Guinea, and even the frigid expanses of Alaska. Despite a commendable sale record of 112.3 million barrels of oil equivalent in the last calendar year and its positioning as a key player in the world’s decarbonisation narrative, Santos has experienced an 8% drop in share price over the last 12 months. This development has caught the attention of L1 Capital, a fund management firm advocating for a strategic reassessment to enhance shareholder value.

asx sto share price

STO: The Strategic Lens of L1 Capital

L1 Capital stands out in the investment landscape with its focus on undervalued entities that boast promising growth trajectories and the ability to generate strong cash flows. Their investment thesis is rooted in the conviction that ASX-listed oil and gas stocks, Santos among them, are poised for an upturn. This optimism stems from a confluence of factors: a surge in global energy demand, a dearth of investment in new supply sources, and a lively trend of mergers and acquisitions within the sector.

The fund manager’s stance is somewhat contrarian, especially considering the pervasive bearish outlook on the energy sector, which is still reeling from the shocks inflicted by the pandemic. The 2020 oil price debacle, characterised by unprecedented volatility and momentary negative pricing, has left a shadow over the sector. Despite these challenges and the cautious approach of US hedge funds towards energy investments — even in the face of robust crude oil prices — L1 Capital sees a silver lining. The combination of geopolitical unrest, a favourable balance of supply and demand, and critically low oil inventories, according to L1 Capital, signal a burgeoning opportunity for growth in energy stocks like Santos.

Santos’ Undervalued Proposition and L1 Capital’s Vision

Santos’ market valuation has been intensely scrutinised by L1 Capital, which deems the shares significantly underpriced given the company’s growth prospects and aggressive capital investments. Over the past two years, Santos shareholders have seen modest returns of 11%, starkly contrasting the 70% returns observed amongst the US oil majors. This discrepancy is attributed to the aggressive share buyback strategies and the sheer popularity of these companies in the American market.

L1 Capital isn’t just analysing from the sidelines; they’ve proposed a strategic pivot — spinning off Santos’ domestic oil and gas assets to transform the firm into a pure-play LNG powerhouse. This move, which has resonated with other institutional stakeholders like Tribeca and Wilson, is predicated on a valuation model that suggests Santos shares could soar by at least 40%, based on a conservative sum-of-the-parts assessment. With a market poised for tightening and Santos’ suite of low-cost, long-life LNG assets that make up the lion’s share of its value, the company is also seen as a prime candidate for acquisition.

STO: Financial Health

The nitty-gritty of Santos’ financial valuation reveals an enterprise-to-EBITDA ratio that sits at an enticingly low 4.2 times, as observed in October. This metric positions Santos favourably against its peers, many grappling with less optimistic growth prospects. Projections suggest that Santos is on a trajectory to bolster its EBITDA by 22% between 2024 and 2027, a stark contrast to the anticipated declines of other energy counterparts.

However, a glimpse at Santos’ return on equity (ROE) presents a more nuanced picture. With an ROE standing at 12%, Santos demonstrates that it can generate a profit of A$0.12 for every dollar of shareholder equity. While this figure is commendable, it trails the industry’s 18% average. Nevertheless, the company’s impressive 34% net income growth over the past five years bears testament to its efficient capital management and bodes well for its expansion prospects.

STO: Outlook

The path forward for Santos is laden with both challenges and opportunities. The energy demand is swelling, strategic initiatives are on the table, and the company’s fundamentals show resilience and potential. Santos’ current undervaluation and its allure as a potential acquisition target make it an intriguing proposition for investors tuned into the market’s nuances.

Yet, the future of Santos hinges on the decisions of its leadership. The proposed demerger, the potential recalibration of its asset portfolio, and the strategies to capitalise on market dynamics will all play critical roles in determining whether Santos can translate its latent potential into tangible value for its shareholders. As the energy sector evolves and adapts to the new realities of a post-pandemic world, Santos stands at a pivotal juncture, ready to redefine its legacy and market position.


In summary, Santos Ltd stands at a crossroads, with significant unrealised value highlighted by L1 Capital’s advocacy for strategic restructuring. Amidst a changing energy landscape, the company’s potential demerger and focus on LNG assets could unlock shareholder value and attract acquisition interest. Santos’ next moves will be closely watched as indicators of its future and the direction of the energy sector at large.

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