The Santos Ltd (ASX: STO) share price has been a disappointing performer in 2021.
Despite merging with Oil Search, the energy producer's shares are down 2% year to date.
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Is the Santos share price weakness a buying opportunity?
One leading broker that believes the Santos share price is in the buy zone following its merger with Oil Search is Morgans.
According to a note this week, after running the rule over the merger, the broker has put an add rating and $8.65 price target on the company's shares.
Based on the current Santos share price of $6.29, this implies potential upside of almost 38% for investors over the next 12 months.
What did Morgans say?
Morgans has boosted its earnings estimates to reflect the merger. And while it does appear to believe the Oil Search business will be a drag on its free cash flows due to higher capital expenditure, it isn't enough to put it off.
It explained: "The merger with OSH has seen our group EBITDAX estimate increase 54% to US$4,135m, indicative of the new earnings platform STO holds post-merger. While over the next three years it is likely STO will have to carry a neutral to negative FCF performance from the OSH business if it progresses development at Pikka (Alaska) and Papua LNG, with capex to 2024 of US$1.2bn combined expected."
The broker also highlights that Santos is expecting synergies of US$90 million to US$115 million after the merger from organisational optimisation. However, it suspects the company could do better than this.
Morgans commented: "STO estimates synergies of US$90-$115m (ex-Alaska) after the merger, from organisational optimisation. We expect the reality will prove better than the promise, with STO's 6-year track record of driving efficiency gains and lean approach at odds with OSH's outsized corporate overheads (despite OSH only operating small parts of its business)."
All in all, its analysts feel this leaves the Santos share price trading at a very attractive for investors. In fact, it believes its lofty price target is reasonably modest.
The broker concluded: "We view our target price as conservative, with a case for value upside from de-risking of growth projects and securing of synergies. The merger leaves STO well positioned to control its own future in increasingly difficult ESG-driven debt and equity markets. We maintain our Add rating."
