ASX 200 energy giant Santos Ltd (ASX: STO) has delivered impressive gains so far this year, with its share price rising from $6.77 in January to $7.80 apiece by Friday's close.
This represents a welcome year-to-date return of 16% for investors.
A key catalyst behind this strong performance is the proposed $30 billion takeover offer from the XRG Consortium, which was announced last month.
Here, XRG has put forward a cash bid of US$5.76 per share to acquire all outstanding Santos shares.
In Aussie dollars, this equates to about $8.89 per share.
As things stand, the proposed buy-out appears on track for conclusion in the coming months, although some regulatory hurdles first need to be overcome.
And leading investment bank Macquarie Group Ltd (ASX: MQG) still sees plenty of upside for Santos shares under the backdrop of this proposed acquisition.
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Strong quarterly update
Late last week, Santos announced an operational update for the second quarter of 2025.
Here, the company reported an uptick in its production and sales volumes and a healthy boost in its free cash flow generation.
Santos also highlighted the continued development of two key growth projects – Barossa and Pikka – which could lift production by 30% in the next couple of years.
Following this positive update, analysts at Macquarie revealed their views on Santos in a research note released on Friday.
What does Macquarie say?
Macquarie highlighted the company's strong cash conversion during the quarter, with free cash flow in Q2 beating the broker's estimates for the second successive quarter.
It also pointed to solid oil and gas production volumes during the period.
This included a "positive surprise" from the company's West Australian and Papua New Guinea assets.
Looking ahead, Macquarie believes that an inflection point for free cash flow generation might be fast approaching for Santos.
It noted that gas production from Barossa could commence in the coming weeks, with oil output from Pikka on track for mid-2026.
More specifically, the broker stated that Barossa is now 97% complete and on budget, with first gas projected for the third quarter of 2025.
It also views the development of Pikka to be 89% concluded, with a host of key works already ticked off the checklist.
Meanwhile, Macquarie believes the takeover offer from XRG is likely to become binding once due diligence is finalised, suggesting a possible completion timeline of early 2026.
In turn, the broker assigned an outperform rating on Santos shares and set a 12-month price target of $8.60 each.
This forecast suggests the potential for 10% upside from Friday's closing price of $7.80.
