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.

Accelerated production growth and strong long-term LNG contracts position Santos for stable revenue, improved margins, and earnings resilience amid rising energy demand.
Advancements in carbon capture and efficiency drive ESG improvements and cost reductions, unlocking new revenue streams and boosting free cash flow potential.
Exposure to commodity cycles, regulatory and environmental risks, and rising ESG pressures threaten earnings stability, growth prospects, and access to capital for Santos.

Catalysts

About Santos

Explores, develops, produces, transports, and markets hydrocarbons in Australia and Papua New Guinea.What are the underlying business or industry changes driving this perspective?

Near-term production growth is set to accelerate with the imminent ramp-up of major projects (Barossa LNG and Pikka Phase 1), positioning Santos to benefit from structurally rising global LNG and natural gas demand, especially in emerging Asia; this should boost future revenue and operating margins.
Strong momentum in securing long-term, oil-linked LNG contracts-92% of portfolio contracted and 80% oil-linked through 2029-enhances revenue visibility and pricing power amid ongoing geopolitical-driven energy security concerns, supporting stable and growing earnings.
Santos' rapid progress and delivery in carbon capture and storage (CCS), highlighted by the Moomba CCS project already storing over 1 million tonnes of CO2e, positions the company to leverage the global transition to lower-carbon energy; this not only helps reduce emissions intensity and improve ESG credentials, but may also unlock new premium revenue streams and support higher net margins.
Company-wide focus on operational efficiency, project self-execution, and continued cost reductions (targeting sub-$7/boe unit costs) is likely to improve free cash flow generation and net margins as new projects come online and CapEx cycles moderate.
A robust pipeline of backfill, infill, and expansion projects (across PNG, Alaska, Beetaloo, and Western Australia) integrated with existing infrastructure increases long-term growth optionality and underpins sustained production and revenue expansion, supporting higher long-term earnings resilience.

Santos Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

Analysts are assuming Santos's revenue will grow by 9.6% annually over the next 3 years.
Analysts assume that profit margins will increase from 19.6% today to 23.2% in 3 years time.
Analysts expect earnings to reach $1.6 billion (and earnings per share of $0.51) by about September 2028, up from $1.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.1 billion.
In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.7x on those 2028 earnings, down from 16.1x today. This future PE is lower than the current PE for the AU Oil and Gas industry at 14.9x.
Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
To value all of this in today's terms, we will use a discount rate of 6.97%, as per the Simply Wall St company report.

Santos Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

Large capital expenditure requirements for major development projects like Barossa and Pikka increase exposure to commodity price cycles and project execution risk, which could negatively impact net margins and result in potential asset impairments.
Decommissioning and remediation liabilities for retiring assets, such as those arising in mature fields and demonstrated by ongoing decommissioning campaigns, require substantial future provisioning and could place downward pressure on future earnings and free cash flow.
Concentrated asset portfolio in politically and environmentally sensitive regions (such as Papua New Guinea and Northern Australia) exposes Santos to regulatory, operational, and environmental risks, potentially disrupting production and impacting revenue stability.
Growing global decarbonization policies, accelerating renewables adoption, and stricter emissions targets may erode long-term demand for LNG and gas, creating structural headwinds for Santos' core business and putting pressure on both revenue and long-term earnings growth.
Increasing scrutiny from investors and higher ESG-related expectations or requirements can raise the company's cost of capital and restrict access to funding or insurance for fossil fuel-related projects, limiting growth opportunities and putting strain on net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

The analysts have a consensus price target of A$8.511 for Santos based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$9.42, and the most bearish reporting a price target of just A$7.6.
In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.9 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 7.0%.
Given the current share price of A$7.83, the analyst price target of A$8.51 is 8.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

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Disclaimer

AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

STO: Focus Will Shift To Project Delivery Following Takeover Withdrawal