Australian hydrocarbon producer Santos (ASX: STO) says XRG Consortium’s USD 5.63 (AUD 8.65) per share proposed takeover offer is no more.

Delays with the scheme implementation agreement, and lack of accord around the appropriate allocation of risk between XRG and Santos shareholders are at cause.

Santos can now refocus on the business of producing oil and gas profitably, and our fair value estimate once again reflects the stand-alone business.

Since the bid announcement in June, we have valued Santos at the midpoint of our stand-alone fair value and the proposed XRG bid price.

We effectively gave the bid a 50% chance of succeeding, with doubt centered on concerns regarding regulatory approvals, particularly given political sensitivity around domestic gas supplies and pricing. In the end, it didn’t even get that far.

Market overly bearish on shares

Santos shares only ever rose to AUD 8.00 peaks following XRG’s bid, the market clearly also holding reservations.

With the bid now dead, we increase our fair value estimate for no-moat Santos by 9% to AUD 10.50. We recently lifted our stand-alone fair value by 5% after upping our midcycle Brent price forecast by USD 5 to USD 65 per barrel.

Following confirmation of the bid’s demise, shares have plunged more than 10%. At around AUD 6.80, we think the market is overly bearish. Santos has attractive growth options and the balance sheet to invest in them: gearing is just 26% and net debt/ EBITDA is 1.3.

Projects expected to deliver a 30% increase in production by 2027 are tracking to plan. First gas from Barossa is slated for this quarter, and Pikka in Alaska is 90% complete.

Our fair value assumes a five-year EBITDA compound annual growth rate of 12% to USD 6.0 billion by 2029. This includes a near-80% production increase toward 160 million barrels of oil equivalent, capturing Barossa and Pikka, but later Dorado oil and PNG LNG.

Santos (STO)

  • Moat Rating: No Moat
  • Fair Value estimate: $10.50 per share
  • Share price September 17: $6.74
  • Star rating: ★★★★

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.