RBC Capital Markets says Santos Limited (ASX: STO) shares are looking pretty cheap at current levels, following the takeover bid from Abu Dhabi's XRG Consortium falling over last week.
The consortium had been offering $US5.62, or $8.52 per Santos share for the company, but the bid fell over on disagreement on a number of fronts, including the need to commit to developing gas for the domestic Australian market.
While some brokers such as Jarden downgraded the stock on the news, albeit while maintaining a higher price target than current levels of $6.76, RBC rates Santos shares as outperform, upgrading the stock.
RBC says Santos is now trading on a 2026 earnings multiple of just 3.5 times, which "looks relatively attractive''.
We see Santos production growing by 34% in 2026 due to a combination of new Barossa Darwin liquefied natural gas (LNG) as from third quarter 2025 and new Pikka oil production as from first quarter 2026, with Santos' unit production costs potentially lowering to about US$7 per barrel of oil equivalent. Santos' new capital management policy from 2027 should deliver higher returns.
Barossa moving ahead
Santos said on Monday that the BW Opal floating, production, storage, and offloading vessel at the Barossa project off Darwin had successfully received the first gas into the facility to start production operations.
This follows the BW Opal achieving ready for start-up status on 16 September 2025, and the commencement of flow from the subsea wells. This is a major milestone for Santos and its Barossa joint venture partners, PRISM Energy Australia and JERA Australia, in delivering the Barossa LNG project.
RBC said 92% of Santos' LNG portfolio was contracted, and 82% was linked to the oil price between 2025 and 2029.
We view this as an attractive structure, that lowers Santos' exposure to volatile spot LNG price movements with significant new global LNG supply entering the market.
Cash to be returned to shareholders
RBC said Santos' debt was likely to peak at US$6.6 billion, or 30% gearing, at the end of this year, before cash flows from Barossa and Pikka rapidly deleveraged the balance sheet.
The speed of this deleveraging is contingent on Santo's spend on other new growth projects, with Santos previously indicating Papua LNG could move forward in early 2026.
RBC said Santos had committed to returning at least 60% of cash flow to shareholders after 2026, increasing to 100% once gearing is below the target range of 15% to 25%.
The broker has a price target of $7.75 on Santos shares.
