Santos Ltd (ASX: STO) shares have become one of the most watched names in the Australian energy sector – and not for all the right reasons.
It's understandable that the gas producer's stock has mostly declined this year. On Friday, Santos shares ended at $6.52, down 19% from their peak mid-August.
Some experts suggest the ASX energy stock is now a strong option, given its improved stability. Let's take a closer look.
Takeover drama and heated debate
This year has seen plenty of takeover drama and heated debate about Santos' environmental record.
The gas producer is currently at a pivotal point in its operations. Santos is generating strong cash flow and is driving future growth by expanding LNG facilities and advancing carbon-management initiatives.
Santos benefits from growing supply and solid contracts, with projects like Barossa expected to increase LNG volumes for Asian markets seeking reliable, high-calorific gas.
The $21 billion business also signed mid-term LNG supply agreements this year, highlighting firm demand for its output. Those operational gains, if sustained, should translate into stronger cash flow and greater optionality for returns to shareholders.
Projects in PNG and Alaska
Santos' strengths include scale and a strong project pipeline. Barossa and international projects in PNG and Alaska diversify revenues and reduce dependence on single assets.
Santos has also been positioning itself on low-emission technologies which it argues will help smooth the company's path through an energy transition.
Regulatory issues and operational hiccups
The optimistic outlook is tempered by significant risks. Santos faced a failed takeover attempt by an ADNOC-led group, revealing governance and regulatory issues that can swiftly lower its share price when deals collapse.
Operational hiccups such as outages and weather disruption at offshore assets, commodity price volatility, and persistent criticism over the effectiveness and optics of emission programs leave the company exposed to both market and reputational risk.
Outlook and what analysts say
It's clear that Santos shares are not without risk. However, they do offer investors exposure to a major, cash-generating gas company with upcoming production growth and plans for lower-carbon operations.
Analysts remain cautiously constructive, reflecting a mix of buy and hold calls. The average 12-month analyst price target sits around $7.40, a 14% upside from the current share price.
Looking to 2026, analysts at Macquarie expect that Santos shares will face headwinds from falling natural gas prices. Macquarie has an outperform recommendation and an $8 price target on Santos shares. That represents a potential upside of 23% from Friday's closing price.
In a recent note, the broker highlights:
We believe an underweight position in Oil & Gas is warranted, given our still bearish oil and LNG outlooks. Within this, Santos remains our top pick, where we see value appeal on an absolute and relative basis (and clear catalysts to re-rate). We see significant value in STO following the deal break with XRG/ Carlyle and expect this to be better recognised once customer deliveries commence from Barossa gas project via Darwin LNG (within weeks) and Pikka oil in Alaska (1Q-2026).
