Why did the Santos share price smash a 2-year high on Thursday?

The leading energy producer is continuing to gain momentum today.

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Key points

  • Santos shares are continuing their upward trend today 
  • There is mixed opinion on the fundamental backdrop of the oil and gas markets. Nonetheless, Santos is in favour with analysts
  • Buyers have pushed the Santos share price 39% into the green this year to date

The Santos Ltd (ASX: STO) share price is enjoying a good day on the ASX on Thursday.

It spiked to a two-year high in early trade this morning, stretching to $8.85 before nestling back down to $8.77 — up 0.11% — at the time of writing.

In its Annual Energy Paper 2022, released last month, JP Morgan noted that “fossil fuel reliance across the developed and developing world is still high (70% even in Europe) and the International Energy Agency projects that the world may still be 66% reliant on fossil fuels in 2050”.

This is reflected in the current oil and gas rally that’s seen Brent crude break out to new multi-year highs on Thursday, to trade at US$123 per barrel on last check.

Meanwhile, US natural gas futures flared up to yearly highs on Wednesday before reversing course south in today’s session. They are still up more than 160% year on year.

The correlation and dispersion between Santos and the oil and gas prices since March is plotted below.

TradingView Chart

Why is the Santos share price rallying?

All the recent talk around ASX energy players such as Santos has been on the outlook for oil and gas in coming years.

Unfortunately, opinion varies widely. Analysts at Macquarie said that, while near-term pricing looks strong, prices are expected to simmer down in H2 FY22.

Those at Macquarie note that increased supply from OPEC and other producers should clamp prices back down below Q2 FY22 averages for Brent crude of US$107/barrel.

“We maintain our long-term assumption of $65/barrel but defer this to Q1 of FY24,” the broker said. Previously it forecasted that target for Q1 FY23.

Despite the planned wind-back, the investment bank is still constructive on the Santos share price, rating it a buy on a $10 per share valuation.

Meanwhile, analysts at JP Morgan see the outlook differently in the bank’s 2022 energy outlook. The JP Morgan team said that, back in 2021, “the stars were aligning” for a rebound in oil and gas.

The reason, it said, was “the result of management decisions to focus on market share and revenue rather than profits, and not because of imminent displacement by renewable energy”.

The big picture [is that] global gas and coal consumption in 2021 were already above pre-COVID levels, and global oil consumption should surpass pre-COVID levels sometime next year.

Aside from that, today’s rise in the Santos share price continues the upward trend experienced by the company this year, having set a series of previous 52-week highs up until today’s session.

Macro backdrop might be a factor

The JP Morgan team also notes that, on a global scale, the energy sector trades at a discount on forward earnings multiples to its historical averages dated back to 1990.

“[The] energy sector trades at 1x book value and is an inflation hedge; also capital intensive and less sensitive to wages,” it added.

Santos currently trades on a forward price to earnings (P/E) ratio of 7.13x and trades at 1.6x book value, according to consensus data obtained from Bloomberg.

These points are yet to be priced in by the market, JP Morgan says, meaning there’s potential for further upside should the market realise these numbers.

“With energy demand still in excess of supply, [we] believe the MSCI Global Energy Composite will outperform both renewable energy stocks and the broad equity market again over the next year,” JP Morgan remarked.

Buyers have pushed the Santos share price almost 39% into the green this year to date, and 14% higher over the past 12 months.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. 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 recommended Macquarie Group Limited. 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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