Should you buy into Santos Ltd’s (ASX:STO) ambitious 100 million barrels of oil expansion?

The euphoria around Santos Ltd’s (ASX: STO) aggressive expansion plan that aims to nearly double its output over the next seven years is quickly dissipating.

The share price of the ambitious LNG major slumped 0.8% to $7.27 in the last hour of trade after surging as much as 1.8% this morning after management detailed how it will grow into a 100 million-plus barrels of oil equivalent (MMboe) energy producer by 2025.

That’s a big deal. To put things in context, our largest energy company Woodside Petroleum Limited (ASX: WPL) is aiming to produce up to 91 MMboe by end of this calendar year and slowing expanding output to reach 100 MMboe by 2020.

The aggressive ramp up in Santos’ production ambitions will come from its acquisition of Quadrant Energy and from its existing assets like Cooper Basin, GLNG and Barossa.

The initial excitement from the announcement wore off as investors started to question if the target was achievable given that the ramp-up to 100 MMboe is dependent on Santos proving up its reserves at a number of its wells.

Management is confident but you have to wonder if some of the bravado stems from the need for Santos’ board to prove that it did the right thing by shareholders when it spurred Harbour Energy’s $14.4 billion (or around $7 a share) takeover offer five months ago.

The stock is trading above the offer price and that has taken some pressure off management, but the share price jump is largely driven by rising global oil prices.

The price of Brent crude has jumped over US$81 a barrel and experts are predicting that it will keep running to around US$100 per barrel by the end of this calendar year as OPEC and Russia are reluctant (or unable) to boost supply in the near-term.

Santos will need to show it’s more than just luck and factors outside its control that is justifying the decision to reject the takeover offer, which has made the stock the best large-cap performer in the energy sector with a 32% gain since the start of 2018.

In contrast, Woodside and Oil Search Limited (ASX: OSH) have both gained around 15% each while the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index is up 2%.

The good times among energy stocks are likely to continue through to the end of this year, if not longer (click here to find out why), but I think taking some profit on Santos may not be a bad idea as the risk of production disappointments has increased after management’s big production promise.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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