The last three months have been positive for the Santos share price, with a rise of more than 10%
Experts expect that gas will play an important part of the energy mix for years to come because of its lower carbon intensity and ability to be part of baseload power
The cyclical nature of energy prices, earnings and the Santos share price makes me cautious at this higher valuation
The Santos Ltd (ASX: STO) share price has been steadily rising over the last few months. It’s up more than 10% since the end of April 2023. With momentum appearing on the company’s side, let’s consider whether the ASX oil and gas share is a buy.
Santos is one of the largest fossil fuel producers in the Australia and Pacific region, with Woodside Energy Group Ltd (ASX: WDS) being the other major locally-listed player.
One of the biggest influences on a business like this is the price of its commodity, so let’s examine whether gas is an attractive industry to invest in, considering the focus away from fossil fels.
Natural gas predicted ‘essential’ for years
In a whitepaper on the energy transition, IML portfolio manager Tim Wood said three factors suggested that gas was a good ‘transition fuel’ and potentially a good investment.
First, it has around half of the carbon intensity of an equivalent coal-fired power station.
Secondly, Wood suggested that gas was relatively affordable — households suffering from high inflation, and increasing electricity costs meant “more people are unable to afford sufficient electricity”.
Finally, the ability of gas to generate power quickly meant it could work well with renewable power when needed.
Vaughan Nelson CEO Chris Wallis said:
I think if you really study history and you think any form of energy’s going to go away, you’ve oversimplified it… we’re using more coal today than we did when we started using it in the 1800s.
I think natural gas is going to play a very significant role in meeting the world’s needs with carbon capture technology… Countris can choose not to use it or to use it, but the globe’s going to use it.
Many readers have probably seen news of company efforts to build up a green hydrogen and green ammonia industry. But, I’d suggest it seems years away that enough green fuel could be made to remotely displace a noticeable amount of natural gas from the global energy picture.
Santos share price valuation
According to current analyst estimate figures on Commsec, Santos shares are predicted to generate 67 cents of earnings per share (EPS) in FY23 and FY24.
That means the ASX gas share is currently valued at around 12x forward earnings. This is still a fairly low price/earnings (p/e) ratio compared to industries such as technology. But, after the recent rise of the Santos share price, it means that it isn’t as cheap as it used to be.
Cyclical business
Commodity companies have a reputation for going through cycles. Sometimes the price goes up and after that, a fall can occur as conditions normalise. Currently tradig at $7.95, look at how much volatility the Santos share price has seen over the past decade.
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For me, the best (recent) time to buy shares in this company was during the energy crash in 2020. I think there is going to be a steady shift to greener energy, and I don’t want to try to predict when there would be a tipping point against gas demand (and the gas price).
I’d rather invest in an ASX share where the long-term seems more positive and predictable.
