Santos Ltd (ASX: STO) shares are down 7% over the past six months. Sometimes a lower share price can open up a 'buy the dip' opportunity for investors. So, Is this a good chance to buy the ASX energy share?
The thing with oil and gas ASX shares is that they're heavily dependent on the commodity price to make more profit in the short term. A higher energy price means new revenue largely adds to profit, while a fall in the commodity price means the reduction in revenue mostly comes from the net profit after tax (NPAT).
Fall in production and revenue
In the first quarter of 2023, production was 13% lower and sales revenue was 13% lower than in the last quarter of 2022. There was lower production because of reduced domestic gas volumes in Western Australia, supported by extended production from the Bayu-Undan field.
Sales revenue came in at US$1.6 billion in the 2023 first quarter, while production was 22.2 million barrels of oil equivalent (mmboe).
The quarter saw the business generate free cash flow of around US$720 million in the first quarter. It also said that it had completed US$466 million of the announced US$700 million share buyback, at the end of March 2023.
Looking at the average realised price, Santos said that the LNG price was US$14.46, down from US$16.92 in the fourth quarter of 2022. The crude oil price had reduced from US$94.71 in the 2022 fourth quarter, down to US$87.59 in the 2023 first quarter.
Santos also told investors that it is making progress with its efforts to decarbonise the energy supply chain. This includes the Moomba carbon capture and storage (CCS) project, which is 60% complete, with the first injection expected in early 2024.
Is the Santos share price a buy?
I'm generally cautious about backing ASX oil and gas shares because it seems to me that demand could reduce in future years as the world moves to decarbonisation.
The spike in energy prices a year ago was certainly a boost for the business, but energy prices certainly seem to be settling down now. But, Santos is still making a lot of cash flow.
I think there is uncertainty thrown up by the intense focus on new gas projects, such as Barossa. A change to the petroleum resources rent tax (PRRT) could mean less future profit for producers like Santos.
Using Commsec earnings estimates, the Santos share price is valued at 9x FY23's estimated earnings. That's pretty cheap, so it may be able to achieve some outperformance in the short to medium term. However, it's not one on my own watchlist to buy. There are other ASX resource shares that I'd rather invest in, such as miners involved with copper.
