Santos Ltd (ASX: STO) shares could be a screaming buy right now.
That's if one leading broker is on the money with its recommendation.
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What is the broker saying about Santos shares?
Goldman Sachs notes that Santos has just released its new capital allocation and revealed an increase to its target free cash flow payout ratio to 60% to 100%.
The change will come into place once key growth projects Barossa and Pikka Phase 1 are online.
Goldman's analysts suspect that this change could "support a 6-10% 2026E dividend yield on our estimates (US$75/bbl Brent, US$10/mmbtu JKM)."
Commenting on Santos' sustainable development and production targets, it adds:
To match STO's more sustainable development and production target we assume Papua LNG is developed and online in 2030, defer Narrabri beyond 2030, assume Pikka Phase 2 is developed as backfill to the 80 kbbl/d Phase 1 facility when ullage becomes available in 2031, and assume Dorado is developed over 2027-2030. Project sequencing will remain subject to potential divestment of interests in Dorado, Pikka, and Narrabri, though STO maintain an attractive funnel of development opportunities to sustain 100-120 mmboe production through the decade and beyond.
In response to the above, the broker has revised its estimates for "2024/25/26 EBITDA -2%/+2%/+2%."
Time to buy
This has led to Goldman boosting its net asset value but maintaining its buy rating and $7.90 price target on Santos shares.
Based on its current share price of $6.86, this implies potential upside of 15% for investors over the next 12 months.
In addition, the broker is expecting a 4% dividend yield in FY 2025, boosting the total potential return to 19%.
Commenting on its buy rating, the broker said:
We are Buy rated on STO on: Attractive valuation: Trading at ~0.8x NAV, with ~40% of growth projects comprising our NAV we see lower risk of schedule delays and capex increases eroding our valuation. Strong near term production growth: Start-up of Barossa expected in 2H25 and Pikka in early 2026 provide a ~30% production uplift or 9% production CAGR over 3 years, providing earnings momentum to offset softening global gas prices. Compounding returns trajectory: Trading on an average 5% dividend yield over the next 3 years with potential to payout up to our forecast FCF over 10% from 2026.
Overall, this could make Santos shares a good option for investors that are looking for exposure to the energy sector.
