Investors should sell their Woodside Energy Group Ltd (ASX: WDS) shares and buy Santos Ltd (ASX: STO) shares, broker Wilsons Advisory says, with several factors making the latter a more attractive buy.
Santos shares took a tumble on September 18, when the Abu Dhabi-based XRG Consortium backed out of a plan to take over the business, with the stock dropping 11.8% on the news to $6.74.
Santos shares have continued to trend lower since then, changing hands for $6.62 at the close of trade on Tuesday.
Santos still looking attractive
But the analysts at Wilsons Advisory say while the share price weakness has been unsurprising, there were some positive takeaways from the process.
Firstly, the consortium maintains a positive view of the business and has respect for the management team. Secondly, the takeover approach itself highlights considerable value in Santos' portfolio that remains underappreciated at its current share price, in our view.
Wilsons says the recent drop in the Santos share price "presents an attractive buying opportunity", and for holders of Woodside shares, they see merit in selling Woodside to buy Santos.
Their "strong preference" for Santos shares over Woodside shares was based on several factors, they said.
The first of these was the more attractive valuation of Santos, which was trading on a forward enterprise multiple of 4.7 times compared to 5.2 times for Woodside.
This is despite Santos having a materially stronger production/earnings growth outlook. We believe downside risk to Santos' valuation is mitigated by Barossa recently reaching first gas, and Pikka coming online in early 2026, which together will deliver a step change in free cash flows over the near/medium-term.
Santos' two major growth projects at the moment are the Barossa gas project off the northern coast of Australia and the Pikka oil project in Alaska.
Secondly, Wilsons said, Santos' growth pipeline was being delivered "admirably well", with Barossa in the process of ramping up after reaching first gas last month and Pikka now about 95% complete.
Wilsons analysts said, "In contrast, despite a heavy capex profile, Woodside is not expected to deliver any production growth over the medium-term''.
Santos was also attractive in terms of the capital returns which would be flowing to shareholders, Wilsons said, with the company intending to return at least 60% of free cash flow to shareholders from 2026, up from 40% previously, with this increasing to 100% once gearing falls below its 15% to 25% target.
Asset sales a possibility
And finally, Santos has the potential to unlock further value through targeted asset sell-downs, Wilsons analysts said, which could deliver even more value to shareholders.
We believe a selldown of Pikka post commissioning (due first quarter of 2026) is high potential, particularly given the Trump Administration's supportive policy backdrop for Alaskan oil. Assuming Santos sells down half of its stake in Pikka, we estimate this could liberate about US$1.15bn of cash, which we expect would be used to fund capital returns to shareholders.
Wilsons analysts also said there is the potential, while less likely, that Santos could demerge into two businesses, with one focused on offshore oil and gas, and one focused on domestic gas.
We believe that Santos' high quality global energy assets – which are primarily LNG (liquefied natural gas) projects – are undervalued by the market in its current structure. By separating Santos' prized LNG assets into a concentrated business without domestic gas market exposure, the group could open itself up to greater interest from global energy players seeking to grow their LNG portfolios.
Wilsons analysts calculated that if broken up, Santos could be worth as much as $9.21 per share.
