Looking to buy cheap ASX shares? Why Santos could fit the bill

Fund managers think this stock could be cheap (and provide diversification).

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ASX share Santos Ltd (ASX: STO) is typically seen as a cheap ASX oil and gas share. The company has seen its share price rise over the past month, but some fund managers think it can keep rising.

Santos is one of the largest oil and gas businesses in the Asia Pacific region, though it's not quite as big as Woodside Energy Group Ltd (ASX: WDS).

According to the profit projection on Commsec, the Santos share price is valued at 11.5x FY24's estimated earnings. Woodside shares are valued at 12.9x FY24's projected profit.

There's a lot more to like about the company than just a cheaper valuation than its larger peer.

Why Santos shares are attractive

Fund manager Wilson Asset Management (WAM) has picked Santos as an investment opportunity in the WAM Leaders Ltd (ASX: WLE) portfolio.

Santos recently confirmed discussions about a potential merger with Woodside. Those discussions are still at an early stage, and details of a potential deal have not yet been released to the market.

WAM noted the company was "committed to unlocking its perceived discount to fair value, as well as optimising its portfolio and pursuing strategic opportunities".

The investment team added:

We continue to see significant upside in Santos given its strong free cash flow generation and attractive asset base at a discounted value, which we believe will likely be realised in the near-term.

Another bullish view on the ASX oil and gas share

There seem to be a number of positive views on the energy company at the moment. I recently covered the positive view held by fund manager L1 Capital on Santos shares.

The Australian Financial Review recently reported that another investor – UK-based activist investor Snowcap — also thought Santos shares were trading at a significant undervaluation. Snowcap's Henry Kinnersley said:

We view Santos as significantly undervalued with a tremendous LNG portfolio, and any deal premium would clearly need to reflect this.

We have spent some time on this, and we think the option of combining Santos and Woodside's LNG assets to create a standalone LNGco seems attractive.

Crucially, it would offer the scale and diversification that a spin-out of either of their LNG portfolios individually would lack.

Snowcap also pointed out that Santos had a number of major growth projects on the go, so a merger could ease the burden on the business.

Santos share price snapshot

Over the past year, Santos shares are up 6%. The cheap ASX share has outperformed the S&P/ASX 200 Index (ASX: XJO) return of around 3% over the same time period.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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