Shares in hydrocarbons giant Santos Ltd (ASX: STO) are now trading back near 52-week highs at the open on Tuesday after regaining strength over the last 2 months.
Santos shares have rallied since December in synch with underlying commodity prices that are now floating above their single-year highs.
The Brent crude oil contract – of which more than 90% of oil pricing in the market is based off – is now thrusting towards $93 per barrel, levels not seen since September 2014. It's bounced from a low of $60 a barrel in February last year and is now up more than 53% in that time.
Hence, Santos is now in favour of the experts once more, with the prospects of record free cash flow yields and superior profit generation cemented on the horizon. Here's what one portfolio manager thinks about the company.
A bullish backdrop
According to Bruce Williams, portfolio manager at Elston Asset Management, ASX energy shares like Santos look set to benefit from a sector rotation into energy and mining that's been gradually occurring over the last two years.
Speaking to an episode of "Buy Hold Sell" on Livewire recently, Williams noted that energy shares have absorbed record high commodity prices and Australia's soaring energy needs quite well in recent times.
"We think with the energy transition dominating headlines, there's been a real focus on the reduction in long-term demand for your traditional energy companies", the portfolio manager said.
The proof's in the pudding too – the S&P/ASX 200 Energy index (ASX: XEJ) is up more than 14% this year to date, whereas the benchmark S&P/ASX 200 Index (ASX: XJO) is down 3% in the same time.
Although the more immediate issue in Williams' eyes is the short-term lack of supply. Over the last 3–4 years, both capital and operating expenditures have lagged behind due to "very low prices", he notes. However, this has changed in recent times, given the mismatch in demand and supply that's stemmed from COVID-19 lockdowns.
"Basically, there is a supply shortfall given the energy needs of the country. We think they will be sensible going forward in terms of how they spend their money. We think they'll run them very lean".
What does this mean for Santos shares?
Given the sensitivity of Santos' stock to fluctuations in the energy markets, the recent commodities rally has meant Williams has taken notice of the sector's cash-generating power.
"The commodity price that drives them is very good, so excellent cash generation. And we think on undemanding multiples it's a really good spot to be at the moment", he said.
Regarding the company itself, Williams likes the runway Santos has over the coming periods, filled with "reasonably low-risk opportunities" in his eyes.
Nevertheless, Santos aligns with the portfolio manager's current search for companies with robust balance sheets and generating sticky cash flow, giving the investor a healthy risk to reward calculus.
"Obviously, the underlying price for oil and gas is very supportive. Lots of free cash generation" he said, regarding Santos. "Post their merger with Oil Search, they're looking at getting rid of non-core operations and also palming down some assets" he added.
"So the balance sheet is really strong as well. We think it's a great place to be at the moment".
Santos closed Tuesday at a price to earnings ratio (P/E) of almost 40x and a trailing earnings yield of roughly 2.6%.
Over the last 12 months, shares have held gains and are 8%, however are soaring this year to date and have gained 20% in that time.
