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The Santos S.A. (ASX: STO) The stock price has had a tough time over the past two months. Since June 8, 2022, Santos has fallen almost 20%.
The price of oil plunged over the same period. So it probably makes sense that Santos shares also fell.
Companies that generate their revenue, net profit after tax (NPAT), and cash flow based on commodity prices can see rapid and significant swings in investor sentiment.
Given the cyclical nature of resources and respective stock prices, does this decline mean that Santos is now an opportunity?
Macquarie analysts pondered this question after the big oil company made another acquisition.
What did Santos acquire?
On August 11, 2022, Santos announced that it had acquired Hunter Gas Pipeline Pty Ltd. Hunter Gas Pipeline has an approved underground gas pipeline route from Wallumbilla in Queensland to Newcastle in New South Wales.
Santos said the route of the underground pipeline passes near Santos’ Narrabri gas project. Its goal is to work with developers and infrastructure owners to build the pipeline and deliver “much-needed” gas to domestic markets on the east coast as quickly as possible.
The pipeline will also be designed to transport hydrogen as customer demand changes during the energy transition.
Santos noted that once fully operational, Narrabri has the potential to supply more than half of NSW’s gas demand. Subject to obtaining remaining government approvals, construction of the pipeline is expected to begin in early 2024.
So what impact could this have on Santos’ actions?
Macquarie’s thoughts on Santos stock price
As reported by The AustralianSantos’ investment represents a “missed investment opportunity” by ABS Group (ASX:APA). Santos will increase competition with APA. In doing so, it deprives APA of the opportunity to be part of the “key” development of the hydrogen pipeline.
Macquarie noted that the Hunter pipeline offers hydrogen development, which would mean it could extend the life of the asset “well beyond” 20 years, which would offset higher fuel costs. steel and distance.
If the Santos pipeline can be fully utilized, gas to Newcastle would be “in the range of about $1.92 per gigajoule over 20 years”, according to Macquarie.
Extending the life of the Hunter pipeline to 40 years by providing an alternative use (namely hydrogen) would reduce the average cost to about $1.50 per gigajoule. This could potentially be cheaper than the Western Slopes Pipeline offered by APA.
How would APA respond to this threat? This could lower prices, but it would reduce returns from the APA pipeline.
Macquarie currently rates Santos as an outperformer, with a price target of $10. This implies a possible increase of almost 40%. At the current Santos share price, Macquarie estimates put Santos shares at less than 7 times projected FY22 earnings.