Is the Santos share price being stifled by ‘reckless’ growth?

Close up of a miner wearing a hard hat with a solemn look on his face, with an oil drill in the background.Close up of a miner wearing a hard hat with a solemn look on his face, with an oil drill in the background.

The Santos Ltd (ASX: STO) share price is up 1% during lunchtime trading.

Shares in the S&P/ASX 200 Index (ASX: XJO) oil and gas company closed yesterday trading for $7.32 each. They are currently trading for $7.39 apiece.

The company’s share price is faring better than the benchmark index which is 0.06% in the green at the time of writing.

Today’s gain puts the Santos share price up 4% in 2023 so far.

But according to United Kingdom-based activist environmental, social and governance (ESG) investor Snowcap, investors should be seeing significantly higher returns.

Why is the activist investor worried about growth projects?

As The Australian Financial Review reports, Snowcap has labelled Santos’ growth strategy, launched by CEO Kevin Gallagher in April 2021, as “misguided and reckless”.

The activist investor believes a series of reforms could see Santos increase its value for shareholders by up to 50%.

Snowcap says Santos has “drastically underperformed” its international peers since 2021 by focusing on developing major new oil and gas projects rather than returning capital to shareholders. Snowcap also took aim at the $6 million bonus incentive for Gallagher, which is dependent on successfully rolling out new projects.

According to Snowcap partner Chris Kinnersley (quoted by the AFR):

Mr Gallagher originally led a successful turnaround at Santos based on many of the same principles that we are arguing for today, namely capital discipline. But the company’s aggressive ramp-up in upstream growth spending has undone much of that good work.

The activist investor believes the Santos share price will suffer if the company doesn’t address the risks from the ongoing global energy transition.

“We believe Santos must take urgent action to reduce its upstream capex, increase capital returns, and realign executive incentives,” Snowcap said. “Doing so has the potential to unlock 30% [to] 50% upside in Santos’ share price and materially improve the company’s alignment with the energy transition.”

Snowcap’s admonishment comes just two days after prime minister Anthony Albanese announced the government’s strong support for gas power in that energy transition.

“Gas in particular has a key role to play, as a flexible source of energy – providing peaking power today and continuing to provide firming and back-up power,” he said.

Indeed, judging by the frantic demand to secure domestic gas supplies over the past year in Australia and across the globe, Santos’ growth projects may not look quite so reckless and misguided once they come online and start producing revenue.

Santos share price snapshot

As you can see in the chart below, the Santos share price is down 5% over the past 12 months.

The post Is the Santos share price being stifled by ‘reckless’ growth? appeared first on The Motley Fool Australia.

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Motley Fool contributor Bernd Struben 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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