Following another unsuccessful bid for Santos, analysts review the company's outlook with a focus on valuation and dividend support.
-Santos' takeover bid scuppered for the third time
-Share price premium eases, focus returns to company fundamentals
-Analysts review valuation and dividend support
-Macquarie sees "extraordinary value" for long-term investors
By Mark Woodruff
The collapse of the $36.4bn non-binding takeover proposal for Santos ((STO)) has pulled the share price below $7 from near $8 earlier and shifted market attention back to fundamentals, with investors now focused on execution and timely delivery of key projects.
The US$5.76 per share indicative offer by the XRG consortium was withdrawn only days before the binding deadline.
Management stated the consortium, led by Abu Dhabi National Oil Company alongside the UAE sovereign wealth fund and US private equity group Carlyle, “would not agree to acceptable terms which protected the value of the potential transaction for Santos shareholders, having regard to the likely extended timeframe to completion and the regulatory risk associated with the transaction”.
XRG stated: “Following a comprehensive evaluation, and taking into account all commercial factors and the terms of the Scheme Implementation Agreement required by the Santos Board, the consortium has determined it will not be proceeding with the proposed transaction.”
Jarden interprets the reference to the Scheme terms as a likely sticking point for the consortium.
While the reasons for the collapse remain secondary, suggests the analyst at Morgans, this marks the third unsuccessful approach for Santos. Morgans suggests a third failure is likely to erode the market’s view Santos shares should trade on a corporate premium.
Previously there were the merger talks with Woodside Energy ((WDS)) in early 2024 and over 2018/19 UK-based Harbour Energy also made a bid.
Morgans expects near-term selling pressure as arbitrage capital exits, and on fundamentals Santos screens modestly overvalued. It’s recommended investors reduce exposure and rotate into peers offering clearer growth trajectories.
The suggestion made is failure of this latest approach to culminate in a formal offer is likely to dampen investor sentiment for an extended period.
In contrast, Macquarie now sees "extraordinary value" for long-term investors, noting Santos shares imply an oil price of US$51/bbl , a steep discount compared with Woodside Energy at US$60/bbl.
In time, Santos shares are expected to surpass the XRG offer price organically.
Ord Minnett believes XRG had no concerns regarding Santos’s portfolio valuation or rehabilitation liabilities, a point that should help underpin investor confidence.
Santos has a diversified portfolio of natural gas, liquefied natural gas (LNG), and oil assets.
The company’s operations span all major Australian hydrocarbon regions, with additional ventures in Papua New Guinea (PNG) and Alaska.
Australia’s largest domestic gas supplier and a key LNG exporter, Santos holds interests in multiple LNG projects, including the Gladstone LNG (GLNG) and Darwin LNG ventures in Australia, and the PNG LNG project in Papua New Guinea.
Where to from here?
According to Morgans, growth for the company now depends on the timely delivery of the offshore gas and condensate field located in the Timor Sea, Barossa, as well as Pikka, the onshore oil project in Alaska.
In late August, Santos announced Pikka Phase 1 was over 90% complete with all major processing modules and a seawater treatment plant were now installed on-site.
Both Barossa and Pikka are progressing well, assesses Morgans, but they are still subject to execution risk and softer oil and LNG markets.
Jarden expects management to now talk up the imminent start-up of Barossa, where first gas is expected by the end of September, as well as the accelerated start-up of Pikka.
Ord Minnett points to a range of positives including the Sockeye-2 oil discovery on Alaska’s North Slope, accelerated depreciation of Pikka assets in Alaska following passage of the OBBA bill in the US Congress, and stronger-than-expected drilling results at the Barossa field.
This broker also highlights favourable LNG pricing in new supply agreements with Japan’s Hokkaido Gas and Qatar Gas.
Some investors may shift focus to a potential ‘break-up’ of Santos, arguing the sum of its parts could exceed the whole, with stand-alone domestic gas and LNG businesses attracting higher valuations.
Unfortunately, with three failed approaches since 2018, Citi suggests investors may increasingly question whether Santos can attract another bidder, or whether portfolio rationalisation should be the next step, particularly in the context of the Australian domestic market.
While a break-up is conceivable, Morgans views this as unlikely given reserve constraints at both GLNG and DLNG.
Beyond Barossa and Pikka, Santos’s portfolio includes future options like the Narrabri onshore gas project in New South Wales and the next development phases of PNG LNG/Papua LNG.
Also, there is the potential revival of the Dorado offshore oil and condensate discovery in the Bedout Basin, Western Australia, in which Santos holds an 80% operating stake, plus further expansion in Alaska.
Valuation and dividend support?
Post the response to the bidding consortium's withdrawal, Santos is trading on a 2026 Enterprise Value/EBITDAX multiple of just 3.5 times, prompting RBC Capital to upgrade its rating.
The Australian average is 6.1 times and the broker’s coverage of US Exploration and Production companies trades on an average of 5.1 times.
Production at Santos is expected to rise by 34% in 2026, driven by new Barossa LNG volumes from the third quarter of 2025, and first oil from Pikka in the first quarter of 2026, with unit costs potentially falling.
Jarden estimates Santos’s underlying value at $7.05 per share based on a US$70/bbl Brent crude price assumption, or $6.39 at US$65/bbl.
The stock offers a 2025 dividend yield of around 6%, highlights Ord Minnett, rising to a compelling 10-16% through 2027–30 as new projects lift production and free cash flow.
On earnings multiples, it’s also noted Santos screens undervalued relative to sector peers.
Macquarie estimates a dividend yield of between 6.9-7.5% across 2026-27, with franking phasing in.
On RBC's projections, Santos’s revised capital management policy should support higher shareholder returns from 2027 onwards.
Management has pledged to return at least 60% of all-in free cash flow (FCF) to shareholders annually from 2027, up from the prior policy of 40% of operating cash flow (OCF) excluding growth capex.
Once gearing falls below the unchanged target range of 15-25%, payouts will rise to 100% of all-in FCF.
Broker views on the outlook
Morgans has removed the corporate premium it previously applied to its valuation, which rebases the broker’s valuation-driven target price to $7.20 from $8.65. Its rating has been downgraded to Trim (between Hold and Sell) from Accumulate.
Equal-weight-rated Morgan Stanley has lowered its target to $7.00 from $8.88 expecting further near-term share price volatility before fundamentals such as free cash flow yield reassert, as investors work through uncertainties around domestic supply and decommissioning.
On valuation grounds, Ord Minnett upgrades to Buy from Accumulate.
Elsewhere, Buy-rated Citi does not rule out event-driven holders exiting after the failed bid. Should these flows unwind slowly amid buyer hesitation, it’s felt the stock could drift further below its fundamental value.
Citi analysts highlight the challenge of persuading investors that stronger cash flow visibility and progress in de-risking growth projects can help offset, at least in part, the absence of a takeover premium.
Jarden expects shareholders to be bruised by the abrupt withdrawal of the takeover offer and to question the board’s recent negotiation tactics.
Key risks to this broker’s Underweight rating include stronger-than-expected oil and LNG prices, lower capital costs at Barossa and in Alaska, and faster project execution.
There are six daily monitored brokers in the FNArena database researching Santos including four equivalent Buys, one Hold, and Morgans' Trim rating. Note: UBS is yet to refresh its research following the withdrawn bid.
The average target has retreated to $7.80 from $8.70, implying nearly 16% upside to the $6.74 closing share price on September 23.
Outside of daily coverage, Jarden downgraded to Underweight from Overweight, while RBC Capital upgraded to Outperform from Sector Perform with targets of $7.05 and $7.75, respectively.
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