Ask the analyst: Why does the Santos story need to end like this?
Santos’ disappointing returns over the past twenty years are mostly a result of bad timing. The timing of its potential departure from the ASX could also be unfortunate.
Welcome to Ask the analyst, where I put questions from Morningstar readers, and a few of my own, to Morningstar’s equity analysts. Questions about ASX companies or industries in our coverage can be sent to [email protected] for consideration.
Today’s questions came from your author, and they concern a company we have covered in this column very recently. You’ll have to forgive the repeat appearance. But it’s fair to say the situation at Santos (STO) has changed drastically since late May.
Bye bye Santos?
Barring an intervention from regulators, Australia’s second biggest oil and gas major looks set to leave the ASX. The company’s board intends to recommend that it accepts a takeover bid from a consortium led by Abu Dhabi National Oil Company.
I thought it made sense to reconvene with our energy analyst Mark Taylor. Especially as his note on the proposed deal seemed to be tinged with a hint of sadness.
In today’s edition of Ask the analyst, we’ll cover how Santos got here, and why it has ultimately failed to deliver for investors over the past 20 years in the manner that Woodside (WDS) has. We’ll also look at why the takeover seems to come at an unfortunate time for Santos shareholders.
My first question to Mark concerned Santos’ long-term performance. As a colleague pointed out to me recently, the $8.89 offer price for Santos in June 2025 is essentially flat against the company’s share price twenty years ago. As we’ll see in a second, share price returns aren’t all that matters. But it’s fair to say that Santos has not delivered impressive returns for shareholders over the past 20 years compared to its peers or the ASX200.
For every $10,000 invested in Santos, Woodside and a leading ASX200 ETF on December 31 2004, an investor would have the following returns as of June 19:
- The ASX200 ETF would have delivered a total return (profit) of around $24,000 from capital gains and gross dividends.
- Woodside shares would have delivered a total return of around $26,000
- Santos would have delivered a total return of just $8,000.
Figure 1: Return for each $10,000 initially invested in Santos, Woodside and ASX200 ETF on December 31 2004. Source: Sharesight returns data as of June 19 2025.
In other words, Santos hasn’t held up well against the index or its closest peer. Woodside’s edge is even greater after tax, as all of its dividends have been fully franked while Santos’ 2023 and 2024 dividends came with 0% franking.
Why has Santos underperformed Woodside?
Of course, no two companies are truly an apples-to-apples comparison. Santos and Woodside were in very different places at the start of the period, which set them up for very different experiences of subsequent oil and gas price cycles.
Mark says that Santos was coming off an era of underinvestment where it milked its Cooper Basin assets for cash and largely eschewed new projects. With perfect hindsight, the timing of its shift back towards growth in the 2010s turned out to be extremely poor.
In the years following the GFC, oil prices rallied from a low of under $40 per barrel in 2009 to a peak of over $100 by mid-2014. But as supply rapidly increases to cash in on this, Brent prices fell below $50 in mid-2015 and towards $30 by early 2016.
Oil and gas projects take a long time to develop from discovery to first production. So by the time Santos’ Gladstone LNG project came online in October 2015, oil prices (which dictate LNG prices) were below $50 per barrel and wouldn’t exceed that level for two years.
Ultimately, the amount of debt taken on to fund Santos’ growth was not feasible in a lower oil and gas price environment. One sign of this was that Santos’ pre-tax adjusted earnings (EBITDA) to interest costs fell from around 25 times into negative territory.
With less profits available to service debt, a halt in dividend payments in 2016 and 2017, and equity investors being heavily diluted in a capital raise, it’s little wonder Santos shares lost over 75% of their value from 2014-17.
Meanwhile, Woodside invested more incrementally (and constantly) in new capacity and was often able to benefit from high oil and gas prices while doing so. As opposed to playing catch up towards what turned out to be a cyclical top.
As an example, Woodside’s major LNG project Pluto came online in March 2013. $100 plus oil persisted for more than a year beyond this point, helping Woodside to reduce debt associated with this project very quickly.
The result? Woodside remained on far stronger financial footing than Santos despite weaker oil prices. It was able to keep paying dividends and didn’t need to raise equity (and dilute shareholders) at a low point in the cycle.
Another case of bad timing for Santos shareholders?
Santos has recovered impressively from those dark days. Net debt currently stands at around 1 times EBITDA in the most recent year, and that EBITDA was enough to cover its interest expenses ten times over.
What’s more, first production at two of its more recent growth projects – Barossa LNG and the Pikka oil project in Alaska – is just around the corner. It should come in late 2025 for Barossa and early 2026 for Pikka.
Mark expects this and other projects to eventually lift overall group production by 25% and support annual EBITDA growth of 11% over his five-year forecast period. This assumes mid-cycle Brent oil prices of $60 per barrel.
Santos’ latest growth investments have been better timed and better managed too – potentially thanks to the tough lessons learned in the past. Yet the long-term fruits of those lessons could elude Santos shareholders.
Instead, investors look set to be bought out at a price that Mark thinks undervalues the firm and its growth potential. The proposed deal price of $8.89 per Santos share is more than 10% below his previous fair value estimate of $10 per share.
It isn’t the most drastic ‘takeunder’ you’ll see. But ADNOC certainly seems to have pounced at a time where oil and gas shares are out of favour and the target company could have far brighter days ahead.
Of course, this all depends on the deal going through. Mark currently gives the bid a 50% chance of success, noting that Santos’ ownership of critical domestic gas assets will push the Foreign Investment Review Board to take a hard look at things.
Have your question answered
Got a question about an ASX company or industry? Send it to [email protected]. It may appear in a future edition of Ask the analyst.
