Motley Fool Australia

Santos (ASX:STO) share price rated top buy in sector by Citigroup

close up shot of gas burner representing asx energy share price
Image source: Getty Images

Oil-exposed ASX stocks are on edge today but this is a good time to be buying the Santos Ltd (ASX: STO) share price.

That’s the view of Citigroup as it called the Santos share price its top pick in the sector.

Jitters about whether OPEC will extend production curbs weighed on oil prices overnight. This triggered early losses in the ASX energy sector which is flip flopping between gains and losses.

Santos share price recovers from early selling

The sector’s heavyweights seem to be faring better in after lunch trade though. The Oil Search Ltd (ASX: OSH) share price gained 0.5% to $3.69, the Woodside Petroleum Limited (ASX: WPL) share price climbed 0.8% to $22.37 and the Santos share price added 0.9% to $6.26.

There’s more room for the STO share price to climb, according to Citi. The broker put a 12-month price target of $7.34 on Santos and outlined six reasons why it’s the best ASX energy stock to own now.

Why the Santos share price is the top pick

The first is management’s consistent track record since 2016. Then there’s its balance sheet which is underpinned by CPI indexed production that will enable Santos to keep its investment grade credit rating as long as the oil price stays above US$25 a barrel.

“[Santos has] the highest returning growth, with capex opportunities in both the base business and major growth projects having long run marginal costs well above long term commodity price assumptions, in turn delivering the best combination of EBITDAX growth and ROE expansion,” said Citi.

“[It’s] the only company we feel comfortable with for farming down growth projects to support the balance sheet.”

Cheapest large cap ASX energy stock

Further, emission reductions can become a net present value [NPV] positive endeavour and the Santos share price is cheaper than its peers.

The broker estimated that the Santos share price implies an oil price of US$45 a barrel, while the Woodside share price implies a US$55 a barrel price and Oil Search share price implies a US$51 a barrel price.

Additional upside from going net zero

Also, what’s not captured in Citi’s valuation is potential upside for Moomba phase 1 carbon capture and storage project.

The unaccounted upside includes LNG price slope premiums from stapling carbon credits to LNG cargoes.

There’s also upside from access to third party CO2, enabling competitive hydrogen price at less than $2/kg, or less ESG related risk for raising debt and equity capital.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of June 30th

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.

Related Articles…