Stocks In Focus: Santos, September 3 2025

0:11G'day, I'm Scott Phillips from The Motley Fool. I'm our Chief Investment Officer here in Australia, and welcome to our weekly series we call Stocks in Focus, the series that goes on the Motley Fool Money podcast and our YouTube channel, where analysts unpack a company you probably know pretty well. Maybe it's in the news, maybe it's widely owned, maybe it's simply important to the Australian economy or the Australian stock market. This is what we do every week. We lift the bonnet on these sorts of companies and tell you a bit more about them and maybe give you a slight sense of the pros and cons of a potential investment in these companies.

0:41And to do that this week, I am joined by Motley Fool analyst, Vincent Wales. Vincent, g'day. Hello, Scott. How are you? Mate, I'm very well, thank you. I hope you are too. Mate, we're going to talk about Santos, the oil and gas player. I'm going to get you to tell us about the company. I'm going to, as I say, give the pros and cons, and I'll get you to wrap it up maybe with a thought about whether or not I might beat the market. Let's stick around for that one. Before I do that, let's remind our viewers and listeners, this is general advice only. We can't give personal advice. We're not licensed to.

1:06We're going to tell you what we think about a company. In this case, Santos, you need to decide whether it's right for your particular circumstances. Second thing, this is a point in time. I know I say it every week, if you're a regular listener or watcher, my apologies, but we want to make sure everybody listening and watching, whether it's now, whether it's later, come some point in the future, they know exactly what to expect from this and frankly, how they should use the information that we're providing. Too few people do that, unfortunately, in the media space a lot of the time. So this is at a point in time.

1:31This is early September, 2025. It's a view of the company at that point, based on what we know, based on the circumstances, the expectations that we have. they, of course, may and will probably change over time. So keep that in mind as well. All right, Vincent, let's do this, mate. Let's talk about Santos. Tell us about the company itself, please. Perhaps an interesting factoid to start off with, it started in 1954. The original name of Santos, I hope I've got the name right here, South Australia Northern Territory Oil Search Company. That was the original name for it. Now, of course, it's one of Australia's largest, it's actually the second largest behind Woodside Oil and Gas Producer.

2:09with diversified exploration and development projects across Australia, Papua New Guinea, offshore and the US. It's quite diversified in terms of its operations. Its core operations are exploration, development of its pipeline, production, transportation and marketing of natural and liquefied natural gas. That's LNG. So perhaps its most famous assets we'll know are the Cooper Basin, Queensland and New South Wales gas fields, the Papua New Guinea project and liquid fire natural gas. And also the one that's coming on is the Alaskan one, which is known as the PICA or PICA project. Not quite sure how you pronounce that.

3:03But also, as we move towards net zero or the intention towards net zero, it's one of the leaders as well in carbon capture technology, which is developing that field as well. Perhaps of note, just to finish off with, it's recently been subject to a takeover bid by a consortium led by Abu Dhabi and a few other people, I think also including Carlyle Group, the commodity group within that. So that kind of obviously throws a bit of a spanner in the works. It depends how this pans out. I think the premium was quite high. Yeah, that's right. Definitely muddies the water in terms of the investment view.

3:44But let's try and go through at least the pros and the cons. Let's assume the takeover itself is a moot point for now. Let's think about the company itself, and we'll get back to the investment or maybe the valuation. But let's talk about the pros. Why would our viewers and listeners consider investing in Santos shares? Well, exposure, first of all, the obvious one is to the growing demand for energy. It doesn't look like it's, you know, the demand for energy seems to be going up, certainly not down. We're moving more towards a digital economy, automation, those kind of fields. There's growing demographics, obviously, in emerging economies that want the same kind of energy benefits that we want in more developed nations.

4:26so there's definitely a consistent and growing demand for energy. It's geographically diversified. It's got its assets quite across the world. It's not relying on one successful liquefied natural gas field to make it a success. And in the pipelines, as I mentioned in Alaska before, it's got some quite attractive potential new product, which is the lifeblood of this kind of company coming down the pipeline. and as you mentioned before as well, it's the leadership in carbon technology which as we, when we do finally meet net zero, it's going to participate in that as well. It's not just purely fossil fuel exposure.

5:10Nice, a lot going on there, lots of potential opportunities. I did like the down the pipeline pun, of course, a lot of gases sent by a pipeline around the country, around the world. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

5:28Now, let's go to the cons. So you talk about why you might want to buy shares in the Santos. Maybe you want the energy growth. Maybe it's about diversification. Maybe it's about the new project. There's some opportunities there. What should our viewers and listeners just be a little bit mindful of? What should either keep them away or at least make them think about balancing the risks and rewards? What's on the cons column, mate? Well, like all, if not most, if not all commodity companies, it's very cyclical. And also they're what is known as a price taker. They have to take the price of the commodity in the global markets.

6:01So they really have to make their differentiate, create their alpha, differentiate themselves through efficient cost management and selecting those projects. those projects, as I mentioned, down the pipeline, which have the best risk reward and the lowest kind of unit cost for generating units of energy. Again, high capital expenditure. It's not like a software company. You need all these offshore oil rigs and all that. So that's high risk and capital intensive. So obviously, it's the bottom line as well. There's competition. It's a globally competitive market. Everyone wants to produce energy for the cheapest possible price.

6:46So, you know, you have to kind of keep up to date with the new technologies, excuse me, and the new projects. And although I mentioned diversification geographically, of course, in terms of its product, it's not very diversified at all. Liquified natural gas, LNG and gas in general. And of course, you can think this is a pro or a con, But as I mentioned before, the takeover bid, if you'll think of investing, complicates the investment decision-making process as well. It really does. And this is where I'm going to try and draw you to a view. But before I do, I'm going to do the usual ad and say, if you're watching this on YouTube, thank you for spending your time doing that.

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7:53So, lots of good stuff on the Motley Fool Money podcast. If you like your podcast, check that one out. And if you're on the podcast now, hey, jump over to the YouTube channel. Have a look. Or maybe, you know, you don't necessarily want to see me in living color, but Vincent's doing a good job, plus lots of other great stuff as well. So, lots for the Motley Fool. All free, by the way. So jump in and grab some of that good stuff. All right, Vincent, back to what we're talking about here, mate, which is Santos as an investment. You mentioned that takeover, and of course, this video and audio may be obsolete pretty quickly if this goes through.

8:19But given the current price, given the current circumstances, given those pros and cons, I'm going to ask you to take a five-year view. Of course, we know this might be cut short soon on that based on what's going on. But as an investor, do you think this is, at the current price, a business that's likely to beat the market or lag the ASX? Well, unusually, I watch normally with commodity companies. It's too often to judge because of cyclicality. But in this case, I think it might actually, if modestly, outperform the market. And the reason I'm saying that is down to the old economics 101, which is supply and demand.

8:56Now, normally, when you get cyclicality, you get increased demand. demand, for example, automation, as I mentioned globally, emerging markets coming through, you get more supply. But we've seen this new, mainly driven by government regulations on net zero, which will almost certainly reduce the supply of fossil fuel, traditional fossil fuel energy sources. The problem is that when you look at the dynamics of it, to hit those net zero targets by 2050, and also the 2030 targets are looking increasingly challenging. And what that means is that you've got restricted supply, because often companies such as Santos go, should we invest in this new project?

9:49Well, if the government says we can't do it or shuts us down after five years, is it worth the risk-reward? So you've got this global environment where you've got a huge increase for demand for energy sources, but potentially a reduced or impaired supply, which would suggest that it could outperform over that period, if modestly. Very good. I was just going to say, slightly that's unusual for a commodity company because often I'd kind of go over five years, it's cyclical. It's notoriously hard to judge commodities over five years. But in this case, I'm going to stick my neck out slightly, I think.

10:36Very good. I like it very much. That's a great summary of Santos and the oil industry in general, oil and gas industry in general. To talk about oil and gas, by the way, they're not exactly interchangeable as energy sources, but they are substitutal to some degree. So we do talk about them in the same breath. And you might realize, mate, the change in energy demand and the potential restriction of supply. It's going to make it a fascinating area to be looking into. So, Vincent, thank you for sharing your view on Santos. Viewers, listeners, thank you for being with us for a little bit of time. We hope you've enjoyed this episode.

10:59Until next time, full on. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services Licence 400691.