Shares of Santos Ltd (ASX: STO) have stretched up almost 36% this year to date as investors continue to wind up the oil and gas trade of 2022.
Brent Crude and West Texas Intermediate futures nudged to 3-month highs in yesterday's trade as Saudi Arabia signalled confidence in demand for its product and raised the price of its crude to Asia by $2.10 per barrel. The increase was also higher than expected.
Both now trade around 8 basis points higher at US$119.81 and US$118.91 per barrel respectively, a shade off the multi-year highs obtained in March.
Meanwhile, investors have rallied Santos to its 52-week highs after a breakout from a 3-month ascending channel in yesterday's trade.
Where is the Santos share price headed next?
Both market and analyst sentiment appears to be strong for Santos at present. On the market side, investors have rallied the stock more than 6% in the same month, with the recent uptick in oil only now being priced in.
With traders bullish on the outlook of oil, as evidenced by the recent price action and market fundamentals, Santos stands to benefit as investors continue to book gains in oil and gas.
Recent movements in the prices for each are plotted on the chart below. Noteworthy is the tight dispersion and high correlation between Brent and WTI oil futures and the Santos share price.
Analysts appear bullish on the company's income and profitability measures, providing more certainty over the predictability of its future cash flows.
The JP Morgan team noted in a recent note that Santos reported free cash flow (FCF) conversion of US$865 million in its last filing, implying an annualised FCF yield of 17%. This also reduces the ratio of net borrowing to shareholder equity (gearing) to 26%.
Another tailwind the JP Morgan team identified is the income to be derived from Santos' planned asset sales.
"With management now looking to sell down assets, strong market conditions could lead to elevated valuations and/or adjustments to how much the company will look to sell," it wrote.
There is a chance this results in delays to the [asset sale] process but given the strong cash flow being generated and our expectations that all growth capex can be internally funded, we are not concerned by this possibility.
Overall, we remain positive on the stock with Santos our preferred stock in the sector.
The broker values Santos at $9.60 per share, a shade off the consensus price target of $9.73 according to Bloomberg data. A closer looks shows that, on average, broker coverage indicates analysts are tilted bullish on the stock.
There are multiple bullish price targets above $10 per share, and 88% of coverage rating the Santos share price reckons it's a buy, the remaining coverage a hold. There are no sell ratings, per this list.
As to where it will head next, only time and the market will have power on that decision. In the last 12 months, Santos shares have surged more than 11% into the green.
