Stock of the day: is a Santos takeover coming soon?

[AI generated]

Stock of the day: Santos (ASX: STO)

Santos, Australia's number one domestic gas supplier, has garnered significant attention following reports that Saudi Aramco and Abu Dhabi National Oil Company (ADNOC) are considering bids for the company. Neither Santos nor Saudi Aramco has responded to requests for comment, while ADNOC declined to comment. Earlier this year, merger talks with Woodside fell through, but Santos indicated it would continue exploring options to unlock its value. Following this news, Santos shares have surged by approximately 5.5%.

Expert opinions on takeover prospects

Market experts believe that the recent takeover interest may signal Santos' undervaluation. Major projects such as Barossa, Picker Phase One, and Moomba are currently between 50% to 85% complete, presenting some execution risk. Despite these risks, Santos' relatively low price-to-earnings ratio of around 12 and a yield of about 5% make it an attractive proposition. Experts also highlight Santos' strong free cash flow and solid balance sheet despite recent production issues and severe weather disruptions.

Investment outlook and market sentiment

Experts suggest holding onto Santos shares given the current takeover speculation and the company's strategic value. They note that while the stock has been range-bound for years, recent interest could trigger upward momentum and attract technical buying. Additionally, the ongoing supply constraints and lack of investment in the energy sector could benefit incumbent producers like Santos in the long run.

Strategic considerations and institutional interests

Institutional shareholders have been advocating for a breakup or transformation within Santos due to its discounted trading value. Santos' significant exposure to liquefied natural gas (LNG) and export terminals, particularly the P&G LNG project, makes it a prime target for firms like Saudi Aramco, which are looking to expand their gas and export capabilities. However, approval from the Foreign Investment Review Board (FIRB) remains a critical hurdle for any potential deal.

In summary, Santos has received significant interest from potential bidders, including Saudi Aramco and ADNOC, driving a notable increase in share price. Despite some execution risks and market volatility, experts remain cautiously optimistic about the company's prospects and recommend holding onto shares while monitoring further developments.