L1 Capital has identified Australian oil and gas producer Santos Ltd as a potential investment opportunity in the volatile ASX energy share market, according to summaries released today. The fund manager perceives Santos' shares as "extremely undervalued" due to its strong earnings growth, substantial cash flow generation, and strategic positioning in the Asia Pacific oil and gas sector.
The valuation comes amidst rising energy demand and under-investment in new supply sources. This environment is further underscored by the West Texas Intermediate (WTI) oil price exceeding US$80 per barrel, ongoing Middle East conflicts, multi-decade low oil inventories, and the recovery of Chinese aviation activity. Despite these factors, investor sentiment remains bearish, comparable to mid-2020 levels.
L1 Capital has proposed a demerger of Santos' domestic oil and gas assets to create a pure-play liquefied natural gas (LNG) company. This move could potentially boost Santos' share price by at least 40%, based on a conservative sum-of-the-parts valuation. The firm's low-cost, long-life LNG assets make up 80% of its asset value and an enterprise value to EBITDA ratio of 4.2 times, making it an attractive acquisition target.
In contrast to Santos' promising outlook, L1 Capital expects EBITDA declines for other energy companies such as Woodside (OTC:WOPEY) Energy Group Ltd, Exxon Mobil (NYSE:XOM), and Chevron (NYSE:CVX) between 2024 and 2027. These projections highlight Santos' significant growth potential amidst increased M&A activity in the sector.
InvestingPro Insights
Santos Ltd's recent performance and future prospects have been closely analyzed using InvestingPro's data and tips. The company's high earnings quality is evident, with free cash flow exceeding net income, and a commendable shareholder yield. Santos has also demonstrated its commitment to shareholders by raising dividends for three consecutive years.
InvestingPro's real-time data further highlights Santos' strong financial standing. The company boasts a market cap of $15644.51 million and a modest P/E ratio of 9.05, suggesting that the stock could be undervalued. The company's revenue growth over the last twelve months as of Q2 2023 stands at 8.57%, although there has been a slowdown recently.
On the profitability front, the company has been profitable over the last twelve months leading up to Q2 2023, and analysts predict this trend will continue. The company has a healthy level of liquid assets, which exceed short term obligations, and operates with a moderate level of debt.
In addition to these insights, InvestingPro offers numerous other tips and data metrics for a deeper understanding of Santos and other companies. These insights can be particularly invaluable in making informed investment decisions.
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