Santos Ltd (ASX: STO) shares have been under significant pressure this week.
Following the collapse of its proposed takeover, the energy giant's shares have tumbled by around 12%.
While this is disappointing, one leading broker believes it has created a buying opportunity for investors.
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What is the broker saying about Santos shares?
According to a note out of Macquarie Group Ltd (ASX: MQG), its analysts believe that Santos shares have been oversold following the takeover collapse.
Commenting on the failed takeover and its valuation, the broker said:
XRG walks – no material valuation impact: The Gas Review is still ongoing, outcomes expected in 4Q25, however XRG's posture on domgas commitment (that appears to have contributed to deal break) now becomes irrelevant. Incoming PNG tax rules (PNG Income Tax Bill 2025) appeared to be another key contributor to deal break, and therefore STO should clarify these differing views in more detail to ensure this issue doesn't prevent a re-rating.
PNG represents 47-48% of STO's revenue and 40-45% of STO's non-current assets (ex tax & financial assets) – keeping these below 50% could be an argument for retaining Alaska oil assets and domestic assets (which could otherwise make good sense to divest/ demerge to realise value).
Macquarie also highlights that Santos is "moving to harvest" next year following a period of significant capital expenditure. But this is money well spent according to the broker. It adds:
The Barossa gas project (Northern Territory) took FID in Mar-2021 (including Darwin LNG life extension work), has delivered first gas and now begins ramping up revenues in 4Q25 (we expect it should ramp quickly, for LNG within weeks followed by first LNG shipment). The Pikka oil project (Alaska) took FID in Aug-2022, and is now set for first oil 1Q26. Major growth capex has averaged ~US$1.7bn in the last 3 years, and pending Papua LNG we expect this significantly reduces in 2026-28.
Big returns
The note reveals that Macquarie has held firm with its outperform rating on Santos shares with a slightly trimmed price target of $8.45.
Based on its current share price of $6.78, this implies potential upside of approximately 25% for investors over the next 12 months.
In addition, Macquarie expects dividend yields of 4.8% in FY 2025 and then 6.9% in FY 2026. This boosts the total potential 12-month return beyond 30%.
Commenting on its recommendation, the broker said:
Outperform. Deal break with XRG consortium was disappointing; however, from current levels, we now see extraordinary value for longer-term investors (STO shares now imply $51/bbl, an extraordinary discount vs WDS US$60/bbl and back-end of the forward curve at US$66/bbl).
