Santos Ltd (ASX: STO) shares are a popular option for investors looking for exposure to the energy sector.
But are they a good pick right now? Let's see what analysts at Macquarie Group Ltd (ASX: MQG) are saying about the energy giant.
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What is the broker saying?
Macquarie was pleased with the company's performance during the first half of FY 2025, with EBITDAX and net profit coming in slightly ahead of expectations. It said:
1H25 results: Underlying FCF (US$1.1bn) and gearing (23.7%) were pre-reported; EBITDAX of US$1.8bn was 1% ahead of Visible Alpha (VA) consensus, and underlying NPAT of US$508m was 3% ahead of VA consensus. The dividend of US$0.134/sh was 11% ahead of consensus, representing a 40% payout of underlying FCF (and is 10% franked, clears out franking account).
The broker also highlights that its takeover is very much alive after several extensions. And while it doesn't expect any competing offers, it does see scope for asset disposals. Macquarie adds:
The XRG consortium's third offer of US $5.76/sh was announced on Monday, 16 June, followed by the original process deed, which allowed six weeks of exclusive DD (to Friday, 8 August). This was extended on 11 August to eight weeks (to Friday, 22 August).
Another four-week extension has now been granted to Friday, 19 September, to "conclude due diligence" (noting it hasn't observed anything in DD that would cause it to withdraw) and to allow the consortium to obtain all necessary approvals to enter into a binding transaction. An alternate proposal looks unlikely now; however, there is clear interest from other parties in the event FIRB conditions dictate domestic asset sales.
Should you buy Santos sales?
According to the note, Macquarie has retained its outperform rating and $8.55 price target on Santos' shares.
Based on its current share price of $7.97, this implies potential upside of 7.3% for investors.
In addition, it expects a ~4.4% dividend yield in FY 2025, boosting the total potential return to almost 12%. It said:
Upside still looks worthwhile (partly shaped by a lacklustre 6- to 12-month oil outlook, rising inventories) despite delayed consortium approvals for the deal to move binding (these may have been driven by STO needing shareholder protections in the event the deal takes longer to complete).
Valuation: Our TP is -0.6% to $8.55/sh, reflecting the offer price (at 0.649 AUD/USD) less the next two dividends (interim 2025 just declared and final 2025 US$0.08/sh). Catalysts: XRG-consortium proposal progression to binding (September), Barossa start (imminent), Pikka start (1Q26, with early potential).
