Santos Limited's Strategic Position in Australia's Energy Transition: Assessing Undervaluation Amid Regulatory and Market Shifts

Australia's energy transition is accelerating, reshaping the strategic and financial landscapes for energy firms like Santos Limited. As the nation pivots toward renewables and decarbonization, Santos faces a dual challenge: navigating regulatory reforms that favor low-emission technologies while defending its legacy as a major LNG producer. This analysis evaluates Santos' undervaluation claims by dissecting regulatory shifts, financial performance, and the fallout from a collapsed $30 billion takeover bid.

Regulatory Reforms and Strategic Tensions

Australia's energy transition is being driven by five key regulatory reforms from 2023 to 2025. The Capacity Investment Scheme (CIS), introduced in November 2023, prioritizes renewable and storage projects but excludes gas, contrasting with South Australia's Firm Energy Reliability Mechanism (FERM), which allows gas participation, according to an Allens analysis. Transmission access reforms have stalled, while the Consumer Energy Resources Roadmap aims to integrate distributed energy resources like rooftop solar. These reforms signal a clear tilt toward renewables, complicating Santos' reliance on gas projects such as its $2.3 billion Narrabri gas project, which received regulatory approval in May 2025, according to Reuters.

However, Santos' strategic position is further strained by legal scrutiny. In October 2024, the Australasian Centre for Corporate Responsibility (ACCR) accused Santos of misleading climate claims, arguing that its "net zero" 2040 target relies on unproven carbon capture and storage (CCS) technology, according to ACCR. The court case, which concluded in November 2024, forced Santos to defend its gas-as-a-"clean fuel" narrative, exposing vulnerabilities in its climate strategy.

Financial Performance and Analyst Valuations

Santos' financials reflect a mixed picture. From 2023 to 2025, the company increased capex for decarbonization to $3–$4.5 billion over a decade, up from $170 million in FY23, per Accela's FY23 analysis. However, its emissions reduction targets remain unmet: Scope 1 and 2 emissions dropped by just 1%, while Scope 3 emissions rose by 9% due to methodological changes. Meanwhile, Santos Energy Solutions, its lower-carbon division, reported an 8% EBIT decline to $212 million in FY23.

Analyst valuations are polarized. The average 12-month price target is AU$7.75, implying a 19.78% upside from the last price of AU$6.47, according to MarketScreener. UBS and Macquarie maintain "Buy" ratings with targets of AU$8.20 and AU$8.25, respectively, while Jarden downgraded to "Sell" at AU$7.05. This divergence underscores uncertainty about Santos' ability to balance gas expansion with decarbonization.

The ADNOC Takeover and Market Reactions

The proposed $30 billion ADNOC-led takeover of Santos, offering AU$8.89 per share (a 28% premium to Santos' pre-bid price of AU$6.96), initially signaled confidence in Santos' asset portfolio, including PNG LNG and Darwin LNG, according to TradingView. However, the deal collapsed in September 2025 after ADNOC withdrew, citing reduced value during due diligence, as reported by the Australian Financial Review. The announcement triggered a 13.6% share price drop, pushing Santos below the original bid price, according to Reuters. This collapse highlights the sector's volatility and the risks of over-reliance on large-scale takeovers for strategic repositioning.

Undervaluation Amid Regulatory and Market Shifts

Despite the ADNOC setback, Santos' valuation metrics suggest undervaluation. As of Q3 2025, the company trades at a trailing PE of 13.14 and a forward PE of 11.16, above the peer average of 10x but below its estimated fair PE of 15.7x, per StockAnalysis. Its enterprise value to EBITDA ratio of 5.75 and price-to-sales ratio of 2.56 also position it favorably within the energy sector. Analysts estimate a fair value of AU$33.25, implying an 81% upside from the current price, according to Simply Wall St.

Fitch Ratings' recent affirmation of Santos' 'BBB' credit rating with a stable outlook further supports its resilience, though the PNG LNG project's regulatory risks remain a concern. The company's strategic pivot toward CCS and nature-based carbon projects could unlock value if execution aligns with its 10Mt CCS target by FY30, per Accela's analysis.

Strategic Crossroads

Santos stands at a crossroads. Regulatory tailwinds favor renewables, yet its gas projects remain critical to Australia's energy security. The ADNOC bid's collapse underscores the sector's fragility, but Santos' asset base and decarbonization ambitions-albeit underperforming-position it to benefit from a potential rebound in LNG demand or a pivot to hydrogen. For investors, the key question is whether Santos can reconcile its legacy operations with the energy transition's demands without sacrificing long-term value.

In conclusion, Santos appears undervalued given its strategic assets, regulatory tailwinds, and analyst optimism. However, its success hinges on navigating legal and regulatory scrutiny while accelerating decarbonization-a challenge that will define its role in Australia's energy future.