LNG hit record highs in 2021 so why did the Santos (ASX:STO) share price struggle?

We consider what’s behind the underperformance of the ASX energy sector.

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A large valuation gap may be opening as Australia’s liquefied natural gas (LNG) exports hit a record high but the Santos Ltd (ASX: STO) share price and ASX energy sector are underperforming.

Our country’s natural gas exports jumped to an all-time high of $48 billion in 2021, as reported in The Australian.

Record gas price fails to fire up ASX energy shares

That’s around a 25% surge over the previous year, based on data from EnergyQuest quoted in the article.

LNG volumes increased a more modest 3.7% to 80.9 million tonnes. This shows how strong LNG prices were in 2021 and experts are also painting a positive outlook this year too.

But someone must have forgotten to tell investors as ASX gas producers were lagging the S&P/ASX 200 Index (ASX: XJO) for the whole of last year.

Santos share price leading the laggards

The Santos share price is barely above breakeven in calendar year 2021 when the ASX 200 Index gained around 15%.

What’s more, Santos is one of the better performers in the sector. The Woodside Petroleum Limited (ASX: WPL) share price dipped 4% while the Beach Energy Ltd (ASX: BPT) share price tumbled 30% in the 12 months to end of last month.

The drag from these heavyweights caused the ASX 200 Energy sector to come in second last for the year with a dip of 1%. Only the tech sector performed worse as these ex-market darlings lost their gloss as bond yields rose.

Why the Santos share price and ASX energy sector are struggling

But investors’ disdain for ASX energy shares is driven by other factors – mainly the global decarbonisation drive and environmental concerns.

The cost of debt to fund fossil projects has increased as banks have also started to shun the sector. And investors here may be shunning fossil fuel-related shares for those leveraged to sustainable energy.

This is evident in the contrasting performance of ASX miners producing minerals for batteries. The Allkem Ltd (ASX: AKE) share price and Pilbara Minerals Ltd (ASX: PLS) are but two examples.

Valuation gap an opportunity?

The interesting point is that Aussies may be quicker to embrace the decarbonisation theme than their global counterparts. US energy shares aren’t penalised in quite the same way as their ASX counterparts, according to The Australian.

This has led some experts to encourage value-focused investors to buy into ASX energy shares like Santos.

More M&A could be in the pipeline

While there’s no stopping the world from moving to a net-zero economy, the valuation gap between oil and gas prices and the valuation of our energy shares may be becoming too great to ignore for some.

If this gap doesn’t close in 2022, we could very well see more mergers and acquisitions.

Should you invest $1,000 in Santos right now?

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Motley Fool contributor Brendon Lau owns Orocobre Limited and Santos Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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