Santos Ltd (ASX: STO) shares are trading 1.24% higher on Tuesday afternoon at $7.76 apiece.
Over the past 12 months, Santos shares have gained just 2.44% in value.
Meantime, fellow ASX 200 oil and gas stock Woodside Energy Group Ltd (ASX: WDS) has lifted 9.1% and international peer Shell PLC (NYSE: SHEL) has risen 32.5%.
This underperformance was a central theme in a letter from fund manager L1 Capital, supported by Tribeca Investment Partners and Wilson Asset Management, sent to the Santos board last week.
It's time to break up, say fundies
The letter was penned by L1 Capital's joint managing director and chief investment officer Rafi Lamm and company partner, James Hawkins.
The Australian reports that Lamm and Hawkins told the Santos board it should split the company in two.
It proposes a main entity comprised of Santos' best liquefied natural gas (LNG) assets. The second business would comprise Santos' domestic gas businesses, as well as the Dorado gas project off Western Australia, the proposed Narrabri project in NSW, and a project in Alaska.
They say this manoeuvre would deliver a 35% increase in valuation (based on today's share price).
L1 Capital claims investors are undervaluing Santos shares. This is because it is too difficult to separate the company's LNG asset value from the rest of the business.
They say creating a company with just LNG assets would attract more investors. It would do so by offering investors exposure to a business set to benefit from one of the biggest investment thematics of our time, the green energy transition.
Many countries are expected to move from coal to gas as a first step in phasing out fossil fuels.
Santos shares could be worth $10.50
Ramm and Hawkins said their analysis shows an LNG business and entity with the remaining assets would be worth $10.50 per share. That's a 35% upside on the price of Santos shares today.
Lamm and Hawkins wrote:
We strongly believe the strategic rationale and value proposition of unlocking the inherent value in Santos' LNG assets justifies the Company initiating a strategic review and seeking external advice to evaluate this proposal.
A Santos spokesperson confirmed receipt of the proposal. They said the company "welcomes feedback from investors and regularly reviews opportunities to create shareholder value".
