Compare The Pair: Woodside Versus Santos

This story features WOODSIDE ENERGY GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: WDS
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

Which of Australia’s two largest oil & gas majors offers the best value? Citi talked to investors to assess the market’s mood.

• Woodside Energy focused on Louisiana LNG sell-downs
• Santos suffers a third failed takeover offer
• Global LNG glut approaching
• Which stock do analysts prefer?

By Greg Peel

In early 2024, Australia’s two largest oil & gas majors, Woodside Energy ((WDS)) and Santos ((STO)) discussed a merger, but nothing came of it.

We note that since Woodside acquired BHP Group’s ((BHP)) Petroleum division, it is by far the larger company.

This past September, XRG Group, a consortium led by Abu Dhabi National Oil Company alongside the UAE sovereign wealth fund and US private equity group Carlyle, made a non-binding offer for Santos but it was withdrawn at the eleventh hour.

Whether either deal would have met regulatory approval (competition/national security) is now moot, and indeed investors would rather see Santos go the other way and break itself up into Australian and foreign operations, unlocking value.

Following the withdrawal of the offer, Santos fell back to trading on fundamentals, and the market questioned whether the company, following three failed takeovers in recent years (Woodside, XRG and before XRG, Harbour Energy), implied the company did not deserve any takeover premium.

Morgans suggested the failure of the latest approach to culminate in a formal offer was likely to dampen investor sentiment for an extended period. By contrast, Macquarie saw “extraordinary value” for long-term investors, noting Santos shares implied at the time an oil price of US$51/bbl, a steep discount compared with Woodside Energy at US$60/bbl.

In time, Santos shares were expected by Macquarie to surpass the XRG offer price organically.

In November, Woodside hosted a capitals markets day which focused specifically on progress towards a final investment decision on two more trains (4&5) at the company’s Louisiana LNG (LALNG) project, while noting its other nearer-term growth projects were all tracking on time and budget.

Woodside had already sold down two equity stakes in LALNG to reduce funding exposure and execution risk, and was looking towards a third sell-down. Management also pointed to a large increase in dividend yield, beginning later this decade, as growth projects came on line and capex diminished.

The question for analysts, and investors, is which is the better investment? Woodside or Santos?

Head to Head

Sector analysts at Citi have held two weeks of investor meetings on this subject. The ASX200 Energy index has been a “pain trade” since oil peaked in June 2022, falling some -14% in the interim, but with prices nearing a bottom on Citi’s forecasts (seeing a bottom in the March quarter 2026), its analysts see this as a key catalyst to reconsider positioning from both an absolute and a relative perspective.

Investors appear to broadly agree Woodside’s LALNG needs a track record before they are willing to ascribe full value. Many agree Woodside has traded reservoir risk for trading risk which requires confidence in commercial and optimisation capability that is not yet proven.

A recurring point of agreement is whether equity holders should withstand periods in which return on invested capital is lower than the company’s weighted average cost of capital.

Investors seem cautious on the economics and sharing of economic rent between sell-down entities amid Saudi Aramco not announcing a recent deal regarding LALNG despite an MOU and heightened media speculation. Without further sell-downs, Woodside risks a more onerous capex burden.

For Santos, the first issue is the sudden dismissal by the chairman of the CFO, after she made complaints about the CEO’s leadership style and Santos’ corporate culture. Is the CEO’s tenure now in question?

Investors are concerned a change at the top could jeopardise the company’s refreshed capital management framework, and thus when, and for how long, a more shareholder return-friendly policy will be implemented.

The next issue is that LNG growth faces an increasingly challenged outlook. Ord Minnett noted last month there are risks to LNG pricing in an environment in which more than 200 million tonnes per annum of LNG are planned to come onstream globally over the next five years, more than 50% of which will be from US sources.

Citi found scepticism remains high among investors with regard Santos’ Browse, Sunrise and other long-dated projects given high up-front costs and regulatory headwinds.

Most investors do not expect a timely final investment decision for Papua LNG, where upstream economics remain challenged amidst increasing uncertainty around an LNG glut.

It is Citi’s perception investors seem to agree a looming oversupplied market will continue to put pressure on contract “slopes”, particularly with the likes of Qatar which has low cash costs and could feasibly drive slopes to high single digits.

Used in oil-linked LNG contracts, the “slope” refers to the percentage of a crude oil indicator at which the LNG is priced.

Investors appeared to agree that for Santos’ onshore Narrbari project, progress is unlikely given permitting challenges, and the same applies to other high internal rate of return opportunities, such as the company’s Pikka brownfield expansions.

Citi notes Woodside is trading at a valuation premium to Santos as investors are unconvinced Santos can unlock value. Investors see a low to nil M&A premium following the recent failed XRG bid, and cite challenges in a potential break-up of the company that could unlock value for high quality assets.

Citi believes de-risking Barossa and Pikka growth, along with a new capital management framework, will serve as nearer-term catalysts which could see the stock re-rate.

Broker Views

Six brokers monitored daily by FNArena cover Woodside and Santos.

Currently, Woodside attracts one Buy and five Hold or equivalent ratings and a consensus target price of $26.12. On Friday, the shares closed -3.8% below that level at $25.15.

UBS has set the lowest target, at $23.60, and Morgans sits atop the market with a $30.60 price target.

On current forecasts, and at today’s USD conversion into AUD, Woodside shares represent 6% dividend yield for the year ending this month, but that yield is projected to decline to 3.5% for next financial year.

Outside of daily monitoring, Jarden rates the shares Overweight with a price target of $25.40.

Santos attracts four Buy and two Hold or equivalent ratings. A consensus target price of $7.53 suggests 15.4% upside from Friday’s closing price of $6.52.

Morgan Stanley is the low-marker with a price target of only $6.76 while the top of the range is formed by three price targets of $8-$8.10.

Contrary to Woodside, consensus is currently not anticipating a major cut in Santos’ dividend next year, but shareholders should expect a lower payout nevertheless.

On current projections, Santos will pay out US22.5c in 2026, down from US23.7c this year. In yield terms this represents 5.2% versus 5.5% (translated in today’s USD/AUD).

Outside of FNArena’s daily monitoring, Jarden rates the shares Underweight with a price target below the current share price of $6.10.

Citi has a Buy on Santos and is Neutral on Woodside.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms