Why this broker is bullish on the Santos share price

Happy man standing in front of an oil rig.

Happy man standing in front of an oil rig.

The Santos Ltd (ASX: STO) share price is having a subdued finish to the week.

In afternoon trade, the energy producer’s shares are trading flat at $6.98.

However, it is worth noting that the ASX 200 index is down 1.1% at the time of writing. So, this means the Santos share price is outperforming today.

Why is the Santos share price outperforming the market?

Today’s relative outperformance appears to have been driven by a bullish broker note out of Citi this morning.

According to the note, the broker has upgraded the company’s shares to a buy rating from neutral and raised the price target on them by 3.5% to $8.60.

Based on the current Santos share price, this implies potential upside of 23% for investors over the next 12 months.

What did the broker say?

Citi made the move largely on valuation grounds after recent weakness in the Santos share price.

For example, since hitting a 52-week high of $8.86 just over a month ago, the company’s shares have pulled back by over 21%.

The team at Citi believe that this has created value for investors, especially given the favourable outlook for gas prices. The latter has led to an upgrade to the broker’s earnings estimates for Santos, which underpinned its price target increase.

Citi commented:

STO shares have retraced and there’s now a strong valuation case. With higher for longer gas price forecasts, we raise CY22-23 earnings forecasts substantially and our dcf is a$8.60/shr.

All in all, the broker appears to believe that this could make Santos shares a decent option for investors that are looking for exposure to the energy sector right now.

The post Why this broker is bullish on the Santos share price appeared first on The Motley Fool Australia.

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