The Santos Ltd (ASX: STO) share price has been heavily sold in 2024 amid a broader rotation out of ASX resources shares.
But could it be set for a jump in the coming year or two?
For starters, the stock is swapping hands at $6.96 apiece at the time of writing. Let's call it $7 to round up.
The long-term market average return is about 10% per year. But what if the Santos share price were to triple that amount and curl up to $9 apiece (34% return)? When could this occur?
None of us have a crystal ball at our disposal. However, we can make some fairly informed inferences based on the economics of the situation. And based on what the experts say. Let's have a look.
Santos share price growth drivers
There are two ways we need to look at this for the Santos share price. The first is what will drive the company's profits, otherwise known as earnings.
The second is what investors might pay for each dollar of these earnings.
Turning to the first part of the equation, there are several factors that might drive Santos' profit growth over the coming years.
However, hitting these targets will depend on various factors, including production levels, energy prices, and the performance of its key projects, such as the Pikka and Barossa LNG operations.
One of Santos' key attractions is its strong free cash flow (FCF) potential, which is driven by these two projects.
According to Ord Minnett, once these projects are up and running and Santos could conduct business on an FCF yield of 20%. Some might say that's good value.
Ord – which has a buy rating on Santos with an $8.40 price target – says this gives flexibility to return capital to shareholders. Think dividends and buybacks. Both could drive flows to the stock.
It also projects dividends of 44 cents per share in FY25, which, at the current share price, gets you a yield of 6.3%.
But it won't just be the mine productivity and efficiencies that will drive earnings and the Santos share price. The underlying commodity market has to be supportive.
Santos recently signed a mid-term LNG deal with TotalEnergies, covering the supply of 20 LNG cargoes starting in the fourth quarter of 2025.
These kinds of moves are important because, as CEO Kevin Gallagher has highlighted, approximately 80% of Santos' sales volumes are indexed to oil prices.
Valuations matter too
The market connects companies to investors, acting as this hypothetical bridge where capitalists can exchange their holdings.
Providing this connection on the quantitative front are market multiples, which serve two functions. One, to bring things into a common size for like-for-like comparisons. And two, as a sort of shorthand for valuation.
The price-to-earnings ratio (P/E) is the most commonly used, and while it has its flaws, it can illustrate how Santos can reach the $9 per share barrier.
It represents the price, in dollars, investors are paying for $1 of a company's profits.
So aside from the actual earnings growth, what investors pay for these earnings going forward matters as well. And it matters a lot.
At its current P/E ratio of around 12 times, the Santos share price has room to grow if the company meets its earnings targets.
According to CommSec, consensus forecasts Santos to earn 75 cents per share for FY25.
Based on this, a straightforward calculation suggests that a 12 times multiple would result in a share price of around $9 (12 x $0.75 = $9.00).
Naturally, if either one of these figures is higher, it could trade above $9. The opposite is also true.
Takeouts on the Santos share price
The potential for Santos shares to reach $9 hinges on achieving its earnings targets and maintaining strong cash flow from key projects.
Whilst it's easy to map out the scenarios mathematically, in reality, there's far more going on. The world will continue to spin regardless.
In the last 12 months, the stock is down 10%.
