The Santos Ltd (ASX: STO) share price and the oil price could be cheap enough right now for the ASX oil and gas share to be a compelling acquisition for some of the largest players in the sector.
According to the ASX, Santos has a market capitalisation of $24 billion, which is a sizeable price tag. But, some analysts believe that the company could be a target because of how the share price is cheaper than peers.
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Earnings valuation
According to the projections on Commsec, the Santos share price is valued at under 9 times FY23's estimated earnings, whereas, as an example, the Woodside Energy Group Ltd (ASX: WDS) share price is valued at around 12 times FY23's estimated earnings.
In percentage terms, Santos would need to rise by around a third to be at the same forecast earnings multiple as Woodside for FY23.
Both ASX shares have different projects at various stages of progression, complicating the comparison. There are other ways to value the two businesses, but I think the forward price/earnings (P/E) ratio is the best at demonstrating the difference in valuation.
Why would Santos shares be an acquisition target?
According to reporting by The Australian, analysts at E&P Financial Group Ltd (ASX: EP1) pointed to Chevron's comments after the oil company's move to buy PDC Energy.
Chevron is trying to buy shale producer PDC Energy in an all-share deal worth US$7.6 billion. Chevron reportedly said that the pullback in oil prices to the US$70s per barrel is "making mergers and acquisitions attractive."
E&P Financial noted those comments by Chevron and suggested that the same reasoning makes the oil and gas ASX share Santos a "potentially vulnerable target", according to the reporting.
The Australian quoted E&P, which said:
We continue to think the sector is well positioned for consolidation given conservative balance sheets… with large, global operations giving them an ability to execute on global trends.
Clearly, Santos could be an M&A target if the stock price doesn't improve versus peers.
There could be potential catalysts for the Santos share price over the next year, according to E&P, including drilling at Barossa and pipeline certainty, a sell-down of PNG LNG, further deleveraging and share buybacks.
Santos share price snapshot
As we can see on the chart above, the oil and gas ASX share was trading above $8 a year ago following the Russian invasion of Ukraine and the subsequent jolt that energy prices got from that. But, it has since dropped back by close to 10%.
