'Big role for gas': A bright reason to buy Santos shares?

The gradual downfall of gas may not be as clear-cut as some suggest.

| More on:
A male oil and gas mechanic wearing a white hardhat walks along a steel platform above a series of gas pipes in a gas plant

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It's been an underwhelming past 12 months for the Santos Ltd (ASX: STO) share price, but investors might be in for better times ahead based on a number of valid reasons.

After firing 134% higher between the depths of the COVID crash and the end of 2022, shares in this oil and gas company have coasted along, unable to hold onto a price above $8. Today, Santos shares are inching 0.3% to $7.73 apiece, less than 5% away from their 52-week high.

Still, the liquefied natural gas (LNG) producer is valued at virtually the same market capitalisation as it was a year ago.

Could this be an example of the market being irrational? Let's pop the locks and take a closer look.

Undercooking a growing need

In a recent paper titled Future Gas Strategy, the Australian Government outlines an outlook for gas that paints a dull picture for Santos and its fellow fossil fuel producers.

According to the government's research, manufacturing gas demand is expected to be in a holding pattern out to 2028. However, demand is projected to decline over the following decades, driven by lower-emission alternatives, such as hydrogen.

The International Energy Agency's Medium-term Gas Report 2023 echoes these findings.

In a report released yesterday, IEA shared its forecast of global gas demand slowing from an average of 2.5% growth annually between 2017 and 2021, to 1.6% between 2022 and 2026 — pointing to the "continued expansion of renewables" — a bleak proposition for Santos shares.

Most of this incremental growth in gas demand is expected to come from China and other Asian markets, as shown in the graph below.

Source: Medium-term gas report 2023, International Energy Agency

While the research suggests a slow decline as electrification grips the world, Santos CEO Kevin Gallagher thinks gas won't be so easily replaced.

Speaking at The Australian Financial Review Energy and Climate Summit, Gallagher explained that gas will play a role in decarbonisation. Likewise, APA Group (ASX: APA) CEO Adam Watson expressed his view that gas would be needed to fill the gaps as coal-fired power gets ousted.

Supply shock round two

A further consideration is that these reports were constructed before the conflict erupted between Israel and Gaza. This draws the supply side of the gas equation into focus, much like the invasion of Ukraine by Russia.

Source: Reuters

The spot price of LNG rocketed to record levels as supplies from Russia, historically the world's largest natural gas supplier, became stranded amid battle. Now, another large portion of the gas supply could be impacted amid geopolitical instability in the Middle East.

As we have seen with oil, the price of LNG could rise if the Israel and Hamas war weighs down production in Saudi Arabia, Israel, or Iran. Already, Israel has requested gas production grind to a halt at one of its offshore platforms off the coast of Gaza, as shown in the tweet above.

The Middle East is projected to account for nearly 15% of global gas production by 2026, according to the IEA.

Is there upside for Santos shares?

As my colleague Tony Yoo reported yesterday, Bell Potter's Christopher Watt is backing Santos shares amid worries about global energy supply.

The private wealth advisor is eyeing Santos' Barossa project as a major catalyst, with it set to deliver its first gas production in FY2025.

Furthermore, the team at JP Morgan recently raised Santos to overweight with a price target of $8.15. This would suggest a further 5.6% upside in Santos shares compared to today's price.

Motley Fool contributor Mitchell Lawler 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 positions in and has recommended Apa Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Energy Shares

A man looking at his laptop and thinking.
Energy Shares

Why is the AGL share price still falling after its 12% November nosedive?

AGL is going through a low energy period. What’s going on?

Read more »

A concerned man looking at his laptop.
Energy Shares

Origin share price continues to fall after shareholders reject Brookfield takeover

Origin's takeover has officially collapsed. What happened?

Read more »

A man stands with his arms crossed in an X shape.
Mergers & Acquisitions

Origin shares on watch after takeover collapses

Shareholders have voted against this energy giant's takeover.

Read more »

A worker with a clipboard stands in front of a nuclear energy facility
Energy Shares

ASX uranium shares run hot as France's Macron pushes for a nuclear Australia

French President Emmanuel Macron may have created some additional tailwinds for ASX uranium shares.

Read more »

Coal miners look resigned to the end of mining this resource
Energy Shares

ASX 200 coal stocks slide amid US pledge to end coal power

Investors in ASX 200 coal stocks will be watching the developments at the Cop28 conference in Dubai closely.

Read more »

woman holding man's hand as he falls representing ups and downs of ASX investing
Energy Shares

The Woodside share price sank 9% in November, what happened?

Woodside is definitely not seeing a Santa rally.

Read more »

A mature aged man with grey hair and glasses holds a fan of Australian hundred dollar bills up against his mouth and looks skywards with his eyes as though he is thinking what he might do with the cash.
Dividend Investing

Did OPEC+ just crimp the outlook for the 2024 Woodside dividend?

Woodside shares delivered an all-time high final dividend in April.

Read more »

A miner in visibility gear and hard hat looks seriously at an iPad device in a field where oil mining equipment is visible in the background.
Energy Shares

ASX 200 energy shares slip as fractious OPEC+ meeting pressures oil price

ASX 200 energy shares are in the red as oil prices resume their downward slide.

Read more »