STO is currently testing its 2-year low, and we see no reason to fade the current weakness. However, further M&A activity is possible with Saudi Arabia and the UAE touted as potential suitors, but this is not a stand-alone reason to start accumulating STO into fresh lows. At the company’s annual investor day on 19 November, Santos CEO Kevin Gallagher announced a new capital allocation framework whereby STO will target returns to shareholders of at least 60% of all-in free cash flow from 2026.
This change comes as large growth projects near completion, and the draw on capital declines. While oil/gas businesses will always remain capital intensive, the big growth projects are nearing production. That means income for Santos will trend higher over time and franking (at some point) will return to their dividends. From a corporate perspective, the timing could be interesting if we see further weakness in the oil price, ahead of project completions that will underpin an uplift in earnings.
- We can now see STO testing $6 after its recent breakdown, leaving us as comfortable observers for now, though it is a stock on our radar
MM may get interested in STO ~$6.00
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