Is the Santos share price a buy following the energy giant’s latest acquisition?

The Santos Ltd (ASX: STO) share price has had a rough time over the last couple of months. Since 8 June 2022, Santos has fallen by almost 20%.

The oil price has taken a dive over that same time period. So it probably makes sense that Santos shares have gone down as well.

Businesses that generate their revenue, net profit after tax (NPAT) and cash flow based on commodity prices can see quick and large swings in investor sentiment.

Considering the cyclical nature of resources and the respective share prices, does this decline mean that Santos is now an opportunity?

Analysts at Macquarie have given that question some thought after the large oil business went for another acquisition.

What has Santos acquired?

On 11 August 2022, Santos announced that it had acquired Hunter Gas Pipeline Pty Ltd. Hunter Gas Pipeline owns an approved underground gas pipeline route from Wallumbilla in Queensland to Newcastle in New South Wales.

Santos said the underground pipeline route passes close to Santos’ Narrabri gas project. Its goal is to work with infrastructure developers and owners to construct the pipeline and deliver “much-needed” gas to east coast domestic markets in the shortest timeframe possible.

The pipeline will also be designed to transport hydrogen as customer demand evolves during the energy transition.

Santos noted that once fully operational, Narrabri has the potential to deliver more than half of NSW’s gas demand. Subject to receiving the remaining government approvals, construction of the pipeline is expected to commence in early 2024.

So, how might this impact Santos shares?

Macquarie’s thoughts on the Santos share price

As reported by The Australian, the investment by Santos represents a “lost investment opportunity” by APA Group (ASX: APA). Santos will be increasing competition with APA. In doing so, it deprives APA of the chance of being part of the “key” hydrogen pipeline development.

Macquarie noted that the Hunter Gas Pipeline offers hydrogen development, which would mean it could extend the asset life “well beyond” 20 years, which would offset the higher steel and distance costs.

If Santos’ pipeline can be fully utilised, gas to Newcastle would be “in the order of about $1.92 per gigajoule over 20 years,” according to Macquarie.

Extending the Hunter Gas Pipeline’s life to 40 years by providing alternative usage (namely hydrogen) would lower the average cost to around $1.50 per gigajoule. This could be potentially cheaper than the Western Slopes Pipeline proposed by APA.

How would APA respond to this threat? It could lower prices, but that would lower the returns on the APA pipeline.

Macquarie currently rates Santos as outperform, with a price target of $10. That implies a possible rise of almost 40%. At the current Santos share price, Macquarie’s estimates put Santos shares at under 7x the FY22 projected earnings.

The post Is the Santos share price a buy following the energy giant’s latest acquisition? appeared first on The Motley Fool Australia.

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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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