STO: Future Share Momentum Will Reflect Takeover Clarity And Rising Free Cash Flows

Analysts have trimmed their price target for Santos by A$0.29 to A$7.53, reflecting a slightly lower fair value and profit margin outlook, while also highlighting improving long term free cash flow prospects and a supportive valuation following the withdrawal of the XRG takeover proposal.

Analyst Commentary

Bullish Takeaways

• Bullish analysts see the withdrawal of the XRG takeover proposal as removing a key overhang, allowing the market to refocus on Santos fundamentals and intrinsic valuation support.
• Upside is seen from the successful delivery of Barossa and Pikka, with forecasts pointing to a step up in free cash flow over the next five years that supports higher implied equity value.
• Reinstatement of a Buy rating by a major global bank, including Goldman Sachs, and upgrades to positive recommendations reinforce the view that Santos is undervalued versus its long term cash generation potential.
• Valuation multiples are viewed as attractive relative to regional peers, particularly if execution on key projects remains on track and capital discipline is maintained.

Bearish Takeaways

• Bearish analysts remain cautious around execution risk at Barossa and Pikka, noting that cost overruns or schedule delays could erode the projected free cash flow uplift and weigh on returns.
• There is lingering uncertainty over broader macro and commodity price conditions, which could pressure earnings and limit multiple expansion despite supportive project delivery.
• Some caution persists that, following the takeover withdrawal, any renewed strategic activity or capital allocation missteps could reintroduce volatility to the valuation.
• Concerns remain that, without consistent delivery against production and cost guidance, the current optimistic earnings trajectory embedded in price targets could prove difficult to sustain.

What's in the News

• XRG P.J.S.C, Abu Dhabi Developmental Holding Company PJSC and The Carlyle Group cancelled their proposed AUD 28.8 billion acquisition of Santos Limited after an extended period of due diligence and negotiations over a scheme implementation agreement, removing a major corporate overhang for shareholders (Key Developments).
• The cancelled takeover had valued Santos at AUD 8.89 per share, significantly above recent trading levels. This valuation had underpinned prior market speculation about strategic alternatives and potential rerating catalysts for the stock (Key Developments).
• Santos announced the resignation of Chief Financial Officer Ms. Sherry Duhe and appointed long serving executive Mr. Lachlan Harris as Acting Chief Financial Officer, with a formal handover underway to support continuity in risk and finance oversight (Key Developments).
• Mr. Harris brings more than a decade of experience at Santos, including roles as Treasurer and Deputy Chief Financial Officer and prior periods acting as CFO. This experience may help reassure investors focused on execution and capital discipline following the failed transaction process (Key Developments).

Valuation Changes

• Fair Value: Trimmed slightly from A$7.82 to A$7.53 per share, implying a modestly lower assessed intrinsic value.
• Discount Rate: Adjusted marginally lower from 6.72 percent to 6.72 percent, indicating an almost unchanged risk and return assumption.
• Revenue Growth: Risen slightly from 9.34 percent to 9.39 percent, reflecting a small uplift in top line growth expectations.
• Net Profit Margin: Eased modestly from 22.24 percent to 22.19 percent, pointing to a slightly softer margin outlook.
• Future P/E: Reduced from 13.16x to 12.94x, signaling a small derating in the forward earnings multiple applied to Santos.