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Highlights
- Santos shares down 12% in 2024 amid strong equity market growth
- Analysts expect 10% earnings growth and a 34% potential return in FY25
- Pikka and Barossa LNG projects could drive free cash flow growth
Santos Ltd (ASX:STO), an Australian oil and gas producer, has faced a challenging year in 2024. While broader equity markets have soared, the company’s shares have dropped by 12% year-to-date. After peaking at $8.04 in August, Santos shares have experienced a steady decline. However, experts remain optimistic about the company's prospects for FY25, with several brokers pointing to a potential recovery.
Analyst Optimism for Santos in FY25
Despite a difficult year for ASX-listed miners, largely due to declining commodity prices, analysts are still bullish on Santos shares heading into FY25. The oil market, in particular, has been volatile. Crude oil prices have fallen from $86 per barrel in May to about $68 currently. According to Trading Economics, global oil producers plan to gradually increase production until 2026, but the outlook remains unclear, especially with geopolitical uncertainties and supply chain challenges.
Nevertheless, analysts continue to view Santos positively. The consensus estimate from CommSec suggests a 10% earnings growth for Santos in the next two years, forecasting a rise in earnings per share (EPS) to 75 cents in 2026, up from 62.5 cents last year.
Free Cash Flow (FCF) and Dividends
Brokers such as Ord Minnett and Bell Potter have rated Santos as a "buy," citing the company’s strong free cash flow outlook. Both firms are particularly optimistic about the company’s Pikka and Barossa LNG projects, which are expected to ramp up production. Ord Minnett estimates that these projects will generate a 20% free cash flow yield, which could translate into higher dividends or share buybacks for investors.
Higher free cash flow is a key factor in determining a company's valuation. Santos is expected to produce significant free cash flow in FY25, and both Ord Minnett and Bell Potter are confident that this will help sustain growth even without higher commodity prices.
Ord Minnett values Santos shares at AU$8.50 each, suggesting a potential return of 28% over the next year. When factoring in dividends, the total potential return could be as high as 34%. This implies a forward price-to-earnings (P/E) ratio of 14x, while Santos is currently trading at a lower P/E ratio of 11x. If the P/E multiple rises to the forecast level, shareholders could see valuation gains alongside any future dividend payouts.
Bell Potter also highlights Santos as a top-value pick, noting that the company has passed its peak level of investment required to sustain earnings growth. Because of this, Bell Potter believes Santos doesn’t necessarily need higher commodity prices to maintain its strong free cash flow outlook in FY25.
The Bottom Line
Santos shares appear well-positioned for a potential turnaround in FY25, supported by strong free cash flow and solid growth prospects. The ramp-up of key projects like Pikka and Barossa, along with steady dividend growth, could help boost investor returns. Despite the challenges faced in 2024, the outlook for the company in the coming year remains positive according to leading brokers.
