The surprising reason why Santos shares could benefit from data centres

One fund manager is bullish about Santos for an unexpected reason.

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Santos Ltd (ASX: STO) shares could be an underrated buy based on what a fund manager has pointed out. Matthew Haupt from Wilson Asset Management (WAM) is optimistic about the ASX energy share due to data centres.

Santos describes itself as one of the leading independent oil and gas producers in the Asia-Pacific region, supplying energy across Australia and Asia.

Australia and Asia use various energy sources to provide customers' power needs. Solar, wind, hydro, coal, and gas all contribute. Interestingly, renewable energy generation has increased from around 10.5% of the total generated in 2010 to 29% in 2021, according to the Department of Climate Change, Energy, the Environment and Water.  

Some investors may think that renewable energy could become the dominant source of energy generation in Australia. One day it might. However, growing energy demand could absorb the additional renewable energy added to the system in the shorter term.

Why Santos shares could be appealing

According to reporting by the Australian Financial Review, the electricity transmission company for western Sydney (called Endeavour Energy) said there are 16 data centres in its distribution area, applications for 19 more connections and a further 18 additional inquiries.

Endeavour Energy said to the Australian Energy Market Operator (AEMO) in a submission that "if realised, we expect data centres alone to reach a peak demand…representing over 250 per cent of our total network demand today."

Endeavour also said data centres are one of the largest drivers of demand, along with electrification and the adoption of electric vehicles.

The AFR also quoted James Magill, the boss of the Origin Energy Ltd (ASX: ORG) unit that serves large business customers, who said:

Some of our hyperscale data centre customers are forecasting growth in their energy demand of up to 30 to 40 per cent between now and 2026/27.

It's this large increase in demand for energy that could benefit Santos, according to WAM Leaders Ltd (ASX: WLE) portfolio manager Matthew Haupt. The fund manager thinks energy demand can double. The AFR quoted Haupt, who said:

Is it going to be met through renewables? We do not think so. So we think the gas journey has longer to play out, and Santos is an incredibly cheap way of playing that thematic as well, as you are not paying for any of these benefits currently.

What is the valuation?

Time will tell what the true price/earnings (P/E) ratio is. But, based on the forecasts on Commsec, the Santos share price is valued at 12x FY24's estimated earnings and 9x FY26's estimated earnings.

WAM Leaders is confident on the Santos opportunity, and the growing energy needs of the country may mean the fund manager is right.

Motley Fool contributor Tristan Harrison 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 no position in any of the stocks mentioned. 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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