When it comes to investing in the energy sector, two companies spring immediately to mind.
They are of course Santos Ltd (ASX: STO) and Woodside Energy Group Ltd (ASX: WDS).
Santos is a $23 billion low-cost producer of oil and gas that is committed to cleaner energy and clean fuels production across operations in Australia, Papua New Guinea, Timor-Leste, and North America.
Whereas Woodside is a $49 billion energy giant with a large collection of world class assets across the globe following its merger with the BHP Group Ltd (ASX: BHP) energy business in 2022.
Is bigger better or should investors opt for Santos shares when looking at the energy sector? Let's see what one leading broker is saying.
Should you buy Santos or Woodside shares?
According to a note out of Morgans, its analysts think that Woodside is the energy stock to buy.
In fact, its analysts believe that the market is unfairly punishing Woodside's shares and sees scope for them to rise materially from current levels. They said:
The tide is certainly out in terms of investor sentiment on WDS. Despite Brent oil trading in line with our long-term forecast, WDS' share price implies a near cycle-low oil price level. We do not see this as capable of being explained by WDS' growth profile (comfortably funded) or risks around non-core assets such as Browse. While the share price performance has been disappointing, supported by a strong balance sheet and high margins, we see WDS investors as capable of being patient. We maintain an ADD recommendation believing WDS offers attractive long-term value.
Morgans has an add rating and $33.00 price target on its shares. This implies potential upside of approximately 27%. The broker also expects some generous dividend yields in the near term.
What about Santos?
The note reveals that the broker has put a hold rating and $7.50 price target on Santos' shares. This is just a touch below where they trade today.
It feels that its shares are less appealing than Woodside's shares at current levels. Morgans explains:
Selling pressure has pushed STO's share price modestly below our A$7.50 valuation, but this still appears within a reasonably close range to our base STO and pricing assumptions. While pleasing for shareholders, it is at odds with the discount that has appeared in STO's ASX-listed peers and leaves us viewing its investment profile as relatively less appealing as a result. This is also demonstrated by the smaller distance to its high case scenario valuation versus larger/safer peer WDS.
Though, if Santos' shares were to fall further, the broker would be tempted. It concludes:
With its investment phase progressing successfully, we maintain a HOLD rating, but a deeper selloff could present interesting value.
