Santos Ltd (ASX: STO) shares have underwhelmed in 2024 and are down 12% this year, in a world where broad equity markets are flying.
Shares in the oil and gas producer closed at yearly highs of $8.04 apiece in August, and have been in a continued downtrend since.
But top brokers have have run the numbers and reckon there's a good chance Santos shares are positioned for growth in FY25. Let's see what the experts have to say.
Analysts are bullish on Santos shares for FY25
It's been a choppy year for ASX miners in 2024, underscored by weaker prices of major commodities.
Crude oil prices have been volatile and have trended lower since May. They now rest at US$68 per barrel, compared to US$86 a barrel back then.
According to Trading Economics, the situation isn't any clearer moving forward either.
It says major global producers plan to "gradually increase output starting in the second quarter and continue doing so until September 2026".
But this hasn't hurt the outlook for Santos shares in FY25. Consensus estimates rate it a buy, according to CommSec.
The consensus earnings growth for the next two years is 10%, and the energy giant could earn 75 cents per share in 2026, up from 62.5 cents last year.
Ord Minnett and Bell Potter both rate Santos a buy. The brokers say the company is set to throw off plenty of free cash flow (FCF) in the coming years. Free cash flow is used in the valuation of businesses, so higher amounts could be deemed a good thing.
Both brokers reckon that Santos' Pikka and Barossa LNG sites are set to ramp up production.
Ord Minnett estimates Santos will produce a 20% FCF yield from the project, which could see it reward shareholders through higher dividends or share buybacks.
What's the valuation outlook?
Ord values Santos shares at $8.50 apiece. It also projects dividends of 41 cents per share in FY24 and 44 cents per share in FY25.
This implies a 28% potential return over the next twelve months, excluding any dividends. When included, the total return could be 34%.
This also suggests a price-to-earnings (P/E) ratio of 14x forward earnings. Santos currently trades at an 11x P/E, meaning if this ratio is correct, there could be some valuation gains.
Meanwhile, Bell Potter also views Santos as a top-value pick.
It says the business has passed the 'peak' level of investment needed to sustain its earnings growth in FY24.
Because of this, it reckons Santos doesn't even need higher commodity prices to see the same level of FCF Ord Minnett is talking about.
Foolish takeaway
Santos shares appear well-positioned for a standout year in FY25, according to experts. This could be driven by a strong free cash flow outlook and a stronger commodity market.
