Following our exit from Woodside (WDS) and the decline by oil overnight, we thought today was an opportune time to revisit fellow ASX Energy Sector play Santos (STO), a stock often discussed negatively, but it is up over +9% year-to-date. As with many ASX50 stocks, the key to adding alpha to a portfolio is timing around entry and exit, i.e. STO has rotated between $6.75 and $8.75 for over eighteen months, a ~~30% trading range that’s provided opportunities for the nimble investor.
“Big Oil” in the US has been very busy over recent months, with Exxon (XOM US) buying Pioneer Natural Resources (PXD US) for ~$US60bn, followed by Chevron’s (CVX US) announcement this week that it will buy Hess Corporation (HES US) for $US53bn – get big or go home! Fossil fuels remain popular with these two huge players who are looking to benefit from many “golden sunset” years of solid demand and rising prices due to massive underinvestment towards new supply as the world transitions to clean energy, i.e. money has been thrown at ESG projects as opposed to bridging the inevitable gap.
STO has made the news this month following L1 Capital’s suggestion the company should be split, creating an LNG business and a more conventional oil and gas business, potentially making the LNG business a potential takeover target in today’s big-scale trend, i.e. an activist shareholder trying to unlock value sooner rather than later. We can see their logic, but it’s less than two years since STO bought Oil Search, so it feels too early to consider splitting the business. A “strategic review” should lay out plans over the coming years, but we cannot see compelling risk/reward favouring STO being re-rated in the short term.
- We are more on the sell side of the Energy Sector into 2024 and see no reason to buck this stance with STO.
MM remains neutral toward STO
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