STO Santos Limited

[AMR]

Darn, we don't have a Santos thread? It's only one of the largest ASX gas companies :(

Looking like a reasonable point to enter here. Support just underneath at $16, could be a nice longer term hold. Any fundamentalist opinions?

[Huang Chung]

Huntley's have them as a 'buy' at these prices.

They see CSG becoming STOs new cornerstone asset (replacing Cooper Basin).

A big unknown is their liability to the Sidoarjo mud disaster in Indonesia.

[shasta]

Huntley's have them as a 'buy' at these prices.

They see CSG becoming STOs new cornerstone asset (replacing Cooper Basin).

A big unknown is their liability to the Sidoarjo mud disaster in Indonesia.

STO Half year results out (various anns)

Half Year Financials
http://www.stocknessmonster.com/news-item?S=STO&E=ASX&N=167825

2008 Results
http://www.stocknessmonster.com/news-item?S=STO&E=ASX&N=167826

Interim Results Presentation
http://www.stocknessmonster.com/news-item?S=STO&E=ASX&N=167828

Capital Management Strategy
http://www.stocknessmonster.com/news-item?S=STO&E=ASX&N=167831

Share buyback
http://www.stocknessmonster.com/news-item?S=STO&E=ASX&N=167832

Proposal for gas fired power station in Western Victoria
http://www.stocknessmonster.com/news-item?S=STO&E=ASX&N=167833

[mark100]

STO looking very attractive at prices under $11. Flogged of 40% of the QLD CSG for US$2b paid off debt, bought back shares etc

Short term production growth is low but STO holds valuable stakes in PNG LNG and QLD CSG LNG. Now trading on a EV multiple of under 4 on my numbers. And WPL is trading on an EV multiple under 5.

When you can buy highly cash generative businesses on these multiples and get exposure to longer term LNG growth I don't know why anyone would bother playing the spec CSG companies in this market. The specs are going to find it impossible to raise cash for drilling and the ones with good ground will probably be bought up by the majors for SFA

[mark100]

True but if the majors have enough reserves to keep them happy for a few years then they could just lets the specs die and then pick over their ground. It's happened all before. As one newsletter I read occasionaly has said, some resource companies that had market caps of almost $1b at the peak are now back to $200m. But before the boom their market caps were $10m. If their funding does dry up they will head back to $10m

[shasta]

not all the sml specs are underfunded

remember a few can call on there new big brothers for funding


and for example ESG, is fully funded for all its drilling

there is still the good old JV if minnows have good ground and need funding in different ways

eg PES and BUL

Remember the CSG fairway is in Queensland/Gladstone...

ESG is in NSW & is a different kettle of fish..

Has dropped somewhat from when i exited at 67c :confused:

[mark100]

Regarding STO, it should also be noted that the 15% shareholding cap is lifted next month. When I read articles that say ExxonMobile is holding US$30b cash and may start looking for acqusitions I think STO could be on the radar. STO have 17% of PNG LNG which would enable Exxon to up their stake whilst also getting a foothold of some of QLD's CSG assets, keeping BG and Connoco at bay

WPL also a potential target now I reckon. Shell's previous bid was rejected on national interest grounds as they wanted to see the North West shelf development proceed. Now that is happening combined with a new LNG industry in QLD a bid for WPL may be looked upon in a different light

[winner69]

STO for years has on 'fundamentals' always looked a better buy than Woodside. Many have said that IF Santos was valued in line with Woodside than you could expect a significant rerating of Santos. That has never happened ... the WPL shareprice generally outperforms STO, over many different timeframes

Woodside appears to have this 'premium' because the market is saying it does business better ..... better strategy? better leadership? more consistent performance? .... hard to put a finger on it but whatever the market memory (perception) is / has been that Woodside is better

I don't see anything changing in this respect and will stick to WPL over STO. Even though the shareprice of each will follow the same sort of pattern history / market memory suggests that WPL is more likely to outperform STO than the other way around

[mark100]

STO for years has on 'fundamentals' always looked a better buy than Woodside. Many have said that IF Santos was valued in line with Woodside than you could expect a significant rerating of Santos. That has never happened ... the WPL shareprice generally outperforms STO, over many different timeframes

Woodside appears to have this 'premium' because the market is saying it does business better ..... better strategy? better leadership? more consistent performance? .... hard to put a finger on it but whatever the market memory (perception) is / has been that Woodside is better

I don't see anything changing in this respect and will stick to WPL over STO. Even though the shareprice of each will follow the same sort of pattern history / market memory suggests that WPL is more likely to outperform STO than the other way around


Yes true STO has always been the poor cousin. My attraction has grown to STO recently though following the Pertronas deal. STO now has net cash on the balance sheet while WPL's balance sheet is going to be getting a good work over funding Pluto etc. Also STO is bound to attract some corporate interest in the next 12 months. I like both but am still going to put more on WPL than STO

[airedale]

STO has pulled back from recent lows below $11.0 to finish the week at $13.49. Perhaps there has been a hint of more corporate activity since the Petronas deal.

[macduffy]

Yes, the date for removal of the 15% shareholding cap draws nearer.

Meanwhile, controversy over the Indonesian mud disaster continues.

http://news.bbc.co.uk/2/hi/science/nature/7699672.stm

[mark100]

Worth keeping an eye on STO on this down cycle. STO have been dressing themselves up for a takeover but the media speculation has died down a bit. Just what any bidding company will be hoping for.

Recent transactions still demonstrate to value in both the PNG LNG project and CSH reserves, despite the lower oil price.

[airedale]

http://i474.photobucket.com/albums/rr105/airedale99/SANTOS.png

Santos and a weekly chart. Monthly momentum has turned up and the chart still looks positive.

[ronthepom]

http://i474.photobucket.com/albums/rr105/airedale99/SANTOS.png

Santos and a weekly chart. Monthly momentum has turned up and the chart still looks positive.

Hi Airdale, STO now starting to move, hows it looking on your chart now?

hope the weather is good over there, did your daughter have a boy or girl?

catch up when you get back. Ron

[shasta]

Ron

STO looking good...

http://www.directbroking.co.nz/cgi-bin/sparkle.dll/superchart?template=dblsuperchart&session=0&instrument=STO&exchange=ASX&period=6M&adj=yes&vs=LINE&ct=CANDLE&compi=&ma1=30&ma2=90&bb=&ind=MACD&ra=2

[ronthepom]

Ron

STO looking good...

http://www.directbroking.co.nz/cgi-bin/sparkle.dll/superchart?template=dblsuperchart&session=0&instrument=STO&exchange=ASX&period=6M&adj=yes&vs=LINE&ct=CANDLE&compi=&ma1=30&ma2=90&bb=&ind=MACD&ra=2

Thanks Shasta,


hopefully things will keep moving, yes they are looking good. R

[ronthepom]

Ron

STO looking good...

http://www.directbroking.co.nz/cgi-bin/sparkle.dll/superchart?template=dblsuperchart&session=0&instrument=STO&exchange=ASX&period=6M&adj=yes&vs=LINE&ct=CANDLE&compi=&ma1=30&ma2=90&bb=&ind=MACD&ra=2

Good full year ann Shasta, $1.6 bil cash on hand.

[mark100]

I note an earlier post on this thread notes that WPL has historically outperformed over all time frames. However on my numbers STO has outperformed WPL at all stages over the past 10 years (only marginally).

Anyway, a bit of chatter is back about STO being taken out. Apparently BG was very keen on STO until the mudflow incident, which is why they went ORG and then QGC. But that incident seems to have been partially resolved. I have also read where Shell would be very interested in STO as a feed for their Curtis Island LNG plans.

A couple of days ago STO broke sharply through its $15 resistance however has fallen back with the market. Will be interesting to see if anything unfolds over the next couple of months.

[mark100]

Santos once again looking quite strong, up 4% as I type despite a down day for the market (ok its not keeping up with BOW)

Must say I am banking on this one being taken out some time this year so I get excited anytime its up substantially more than the market

[mark100]

Santos up 5% as I type, outperforming other large cap oilers. I smell corporate activity

[winner69]

You could be right there mark ..... good luck to you if it is the case.

I think the outperformance of WPL over STO is mainly around valuations and to some extent earnings performance .... both important components of market sentiment

While this has persisted WPL has always traded at higher multiples than STO ... which has for years made many lament the 'cheapness' of STO relative to WPL ... and made many wonder why the STO shareprice isn't much higher than what it 'should' or 'could' be ... and so has been seen by the market as an underperformer.

That may be all changing eh .... at least it has since just before Christmas

[macduffy]

Santos up 5% as I type, outperforming other large cap oilers. I smell corporate activity

Not so sure about that. More a case of a slightly better outlook for oil I reckon.

BPT, though not a large cap in the same class as STO, is up 5.5% today. STO now up 2.9%

[mark100]

Perhaps I am reading to much into STO's rise. However when I look at the other oilers on my list, OSH, WPL and AWE they only finished up 0.5-1% while STO was up 3.4% in the end. STO's shart has also broken out.

I think BPT is strong because the market is expecting them to get a good price for their Tipton West stake.

Winner69, true WPL has always traded at a higher multiple of Market Cap to Reserves. I think maybe the removal of the 15% shareholding cap in Nov has allowed a takeover premium to get built into the price over the past few months

[bermuda]

Perhaps I am reading to much into STO's rise. However when I look at the other oilers on my list, OSH, WPL and AWE they only finished up 0.5-1% while STO was up 3.4% in the end. STO's shart has also broken out.

I think BPT is strong because the market is expecting them to get a good price for their Tipton West stake.

Winner69, true WPL has always traded at a higher multiple of Market Cap to Reserves. I think maybe the removal of the 15% shareholding cap in Nov has allowed a takeover premium to get built into the price over the past few months
Hi Mark,
Went to a meeting tonight. Santos is hot. I dont own any but got the feeling that this could go past $20...and more quickly. They have heaps of CSG.

But not enough to get me out of BOW and VPE.

[mark100]

Hi bermuda, yeah STO is never going to give you the leverage of BOW and VPE but I don't have the guts to back the truck up on the spec plays like you have, not in a bear market anyway. I obviously sold BOW too early and am now one of the punters hoping for a pullback.

On STO, the CEO has said Santos is ready to dance in the consolidation game. I thought page 20 of Origins presentation today was good. It showed Origin and BG are the 2 dominant CSG reserve holders in Australia now. If you have the view like me that only 2 LNG plants will get built in Gladstone then you would have to say any of the smaller parts of the pie chart on page 20 are up for grabs in the consolidation game. Of the bigger plays that would include the Santos and Arrow and then of course the smaller fry like BOW, VPE etc. If Shell is serious about a Curtis Is plant they have to get serious soon because they are being left behind. I also read on Bloomberg this week that BP is interested in Australian CSG as it wants to expand its LNG business.

Also remember that STO has a decent size stake in the PNG LNG project, potentially quite valuable to a predator. Exxon is behind this project and with their wads of cash and credit rating I expect PNG LNG to obtain project finance.

[mark100]

Well my theory that something was brewing was smashed today. Down almost 7% today vs 4.5% down for WPL. Makes that chart look a bit ugly now

[mark100]

There has been almost daily speculation in the media regarding a large oil deal involving STO these past few weeks. Where there is constant smoke there is fire?

Today the speculation suggests Shell is preparing to sell its 35% stake in WPL with BHP a possible bidder considering the cash its has raised recently. The theory is that Shell would then look to take out STO. Shell has recently selected Petronas as a partner in another LNG project so Shell should be comfortable with STO's JV with Petronas.

Personally I would like to see STO remain majority Aust owned but can't see that happening unfortunately so hopefully any bidder overpays me for my shares

[macduffy]

http://www.theaustralian.news.com.au/business/story/0,28124,25565726-36418,00.html

I'm increasingly attracted to STO these days and bought back in, in a modest way, recently.
Question is, do I now sell the rest of my BPT and load up on STO?

[mark100]

http://www.theaustralian.news.com.au/business/story/0,28124,25565726-36418,00.html

I'm increasingly attracted to STO these days and bought back in, in a modest way, recently.
Question is, do I now sell the rest of my BPT and load up on STO?

Hi macduffy, my view on BPT is that there are too many assets spread all over the place. Maybe that reduces project risk through diversification but it also causes a lack of focus I reckon. STO appear to be moving the other way, increasing their focus on just their prime assets and selling off the other stuff

[macduffy]

Hi macduffy, my view on BPT is that there are too many assets spread all over the place. Maybe that reduces project risk through diversification but it also causes a lack of focus I reckon. STO appear to be moving the other way, increasing their focus on just their prime assets and selling off the other stuff

Thanks, mark.
That's pretty well my take on the situation. I like the concentration on prime assets, especially PNG LNG project, GLNG project and their position on CSG. Might be said to be big, risky projects but they have strong partners there in Exxon and Petronas.
BPT on the other hand have sold their CSG interest and are placing a lot of emphasis on their foreign interests, particularly Egypt.

[soulman]

http://www.theaustralian.news.com.au/business/story/0,28124,25565726-36418,00.html

I'm increasingly attracted to STO these days and bought back in, in a modest way, recently.
Question is, do I now sell the rest of my BPT and load up on STO?

I guess you didn't have STO before their cap raising?

One share to buy right now I thought was STO with oil prices going up and CSG still chucking along. I got my bid in at $13.50. Might be a long wait.

[macduffy]

An interesting interview here with David Knox, CEO of Santos.

What he has to say about the Cooper Basin will also interest those of us who follow Beach.
CSM comments pertinent to AOE and others.

http://www.businessspectator.com.au/bs.nsf/Article/KGB-TV-David-Knox-pd20090707-TQ3JT?OpenDocument&src=kgb

[bermuda]

An interesting interview here with David Knox, CEO of Santos.

What he has to say about the Cooper Basin will also interest those of us who follow Beach.
CSM comments pertinent to AOE and others.

http://www.businessspectator.com.au/bs.nsf/Article/KGB-TV-David-Knox-pd20090707-TQ3JT?OpenDocument&src=kgb

Macduffy. Excellent interview. Thanks for your post. This Gladstone is going to be increasingly huge news for all CSG holders in the next 3 years.

[JBmurc]

An interesting interview here with David Knox, CEO of Santos.

What he has to say about the Cooper Basin will also interest those of us who follow Beach.
CSM comments pertinent to AOE and others.

http://www.businessspectator.com.au/bs.nsf/Article/KGB-TV-David-Knox-pd20090707-TQ3JT?OpenDocument&src=kgb

An STX with them drilling for CSG in the Southern cooper basin later this year

[macduffy]

PNG LNG Project receives final approvals to proceed.

http://asx.com.au/asxpdf/20100315/pdf/31p7yyycjs6xjm.pdf

[upside_umop]

I see they are now delaying Gladstone. Well, I havent seen a definitive announcement (nor have I really looked!) but picked this up from Bloomberg.

http://www.bloomberg.com/apps/news?pid=20601087&sid=alzOE3RedVcA&pos=6


Santos Ltd. (http://www.bloomberg.com/apps/quote?ticker=STO%3AAU), Australia’s third-largest oil and gas company, said May 19 it needs a better understanding of the tax measure before it can proceed this year with a project in Queensland state. The company, based in Adelaide, said this month it now aims to make a development decision on its liquefied natural gas venture later this year, as opposed to its prior mid-year target.

If this is the case, wont most FID's be delayed? Not looking good, a bit of disaster along with ETS etc. Still, the long term future for LNG looks good.

Just to clarify, this is not a reversal on Macduffy's post above....its to do with Gladstone!

[macduffy]

There'll be a lot of cautious statements about pending projects while "consultation" on the new tax continues.

Too early to draw any conclusions, IMO, but markets don't like uncertainty, that's for certain!

[Dr_Who]

Uncertainty = opportunity

My guess is the Rudd er less govt will back down and water down the 40% tax to pls everyone. Once everyone is happy it will be back to business as usual.

[upside_umop]

I'd like to see the tax go away, for sure. But when you read Swans statements like:

The government “will not be deterred by this scare campaign,” Swan said. “Nobody should doubt the government’s resolve to make sure the community gets a fair share of the mineral resources that belong to the Australian people.”

You can tell they're serious.

[macduffy]

That still leaves room for compromise around the details although after the debacle of the Emissions Trading Scheme I agree the govt can't afford a heavy defeat/backdown. Though BHP for one would argue that the "community" already gets a fair share via taxes on its Australian operations of around 43%.

Let's just hope that the govt has enough sense not to kill the Aust economy's golden goose!

[bermuda]

That still leaves room for compromise around the details although after the debacle of the Emissions Trading Scheme I agree the govt can't afford a heavy defeat/backdown. Though BHP for one would argue that the "community" already gets a fair share via taxes on its Australian operations of around 43%.

Let's just hope that the govt has enough sense not to kill the Aust economy's golden goose!

The Australian voters aren't stupid. They have had enough of this guy Rudd. He doesn't understand the worldwide ramifications of this huge mistake and he has done so many back flips on other issues he will be too scared to back down on this the most important one. The Voters will vote him out.

[macduffy]

STO announces that it has sold 15% of GLNG to Total for $650m and firmed up further contracts for sale of the product.

http://www.asx.com.au/asxpdf/20100909/pdf/31sdxxvghnqc9m.pdf

Another vote of confidence for coal seam gas!

[mark100]

Hi macduffy, I thought the news the pretty p!ss poor to be honest. For all the waiting, STO have still not fully contracted their two trains and they are relying on Petronas to take more gas. In the process they now lose out on the $550m bonus payment they were going to get from Petronas on approval of Train 2. So they get $650m from Total but have effectively 'paid' Petronas $550m to buy more gas from the project. And we are still waiting to hear if KOGAS will take some gas but obviously its not going to be much considering Petronas have had to sign up for more.

I still hold a modest amount of STO, not sure why. I write call options on them sometimes and thats about the only profit that STO makes me

[Dr_Who]

Grunauer, the Nomura analyst, said he had expected Santos to get as much as $1.5 billion for 15 percent. The proceeds from the Total deal won’t be enough to fund Santos’ share of the costs to develop the project, and the company may need to raise about A$2 billion by selling shares, he said.

http://www.bloomberg.com/news/2010-09-09/santos-petronas-agree-to-sell-stakes-in-gladstone-lng-project-to-total.html

[mark100]

Anyone expecting A$1.5b had to be smoking something. The amount Petronas paid for 40% back at the market peak in 2007 was US$2b for 40%. Since then the market for gas has deteriorated although the project has achieved some milestones, these 2 facts probably balancing out against each other. But also with this sale STO would have been offering a discount in order to get Total to sign up for a gas offtake as well.

So assuming the same metric as what Petronas paid you could expect US$750m (A$830m) but then a discount to lure Total into taking some gas as well. I see UBS expected US$750m as the very best STO might get but expected more like US$500m (A$550m). So $650m seems not too bad.

The biggest negative I see is letting Petronas off the hook for its $550m at T-2 approval in return for them taking more gas. You would have hoped they could have found another Asian buyer somewhere without having to let Petronas off the hook for $550m

[Dr_Who]

Mark, you think it is a good buying opportunity on sp weakness?

[mark100]

Could fall further because everyone knows a rights issue is on the way. But after that is digested it should be ok for a recovery

[macduffy]

I agree that $1.5b was an unrealistic number given the outlook for the market for gas.

STO was in a fairly vulnerable position, despite its alliance with Petronas, considering the number of planned csg to lng plants and the muscle of some of the others. So to tie up another strong partner and to secure further sales contracts is worth giving a bit in the price, IMO.

I see this as a vote of confidence for coal seam gas to lng generally but I'm not entirely convinced about STO. Clearly, neither is the market!

[macduffy]

And this from CitiSB.

Santos has announced that it will sell a 15% stake in the GLNG project to Total for A$650m, and PETRONAS will also sell a 5% stake to give Total a 20% stake in the project. This price is less than our estimated US$750m price for the sale of 15% stake, and is a ~38% discount to the multiple paid by PETRONAS. Santos has additionally announced that it will not receive the US$500m progress payment from PETRONAS at FID of a 2nd train. We had previously written on our expectations of reserves not being sufficient to supply 2 trains, but we're of the understanding the payment was pro-rated on GLNG reserves supplied to the 2nd train. We had assumed a second payment of US$300m, but to not receive any of the payment is disappointing. We would expect the combined effect of a lower sale price and loss of PETRONAS payment would lower consensus valuations by ~2%. In parallel the GLNG JV has signed a binding Heads of Agreement with Total for the sale of 1.5mtpa of LNG, and PETRONAS has increased its off-take to 3.5mtpa. GLNG now has 5mtpa of contracted sales, leaving 2mtpa of off-take to be signed at a later date. Santos has stated it is in on going discussions with other Asian LNG buyers including KOGAS, and further off-take could include further equity sell-down given STO stated it would have a "maximum of 45%" interest in the project. The sell down of equity places a se-through value of ~A$3.12/shr on STO's 60% stake in GLNG. We had valued the STO base business + PNG at A$12.41/shr prior to the announcement and as such we see a see-through value of ~A$15.50/shr for Santos. Buyers have historically purchased project equity at a discount to valuation noting Tokyo Gas and Kansai Electric bought a 10% stake in Pluto-1 for A$176m, and hence we are comfortable seeing value in Santos >A$18/shr on an unrisked basis. We have a buy recommendation on Santos with a Target Price of A$17.98/shr. Santos Ltd (STO.AX; A$13.75; 1M)

[Dr_Who]

Bring on the rights issue.

I am assuming STO can be a potential T/O if the sp weakens further.

[macduffy]

Here's Stephen Bartholomeusz' take on the subject.

http://www.businessspectator.com.au/bs.nsf/Article/Santos-Total-Petronas-LNG-gas-pd20100909-95663?OpenDocument&src=srch

[macduffy]

No final Korean deal announced yet but the Gladstone LNG plant's looking better all the time!

http://www.theaustralian.com.au/business/santos-seals-70bn-gladstone-gas-deal-with-korea/story-e6frg8zx-1225972395754

[macduffy]

Things move on!

The deal with Kogas was signed last week; a $500m institutional placement has been successfully completed; STO shares up strongly today on the news.

http://www.smh.com.au/business/santos-jumps-after-gladstone-deals-20101220-192by.html

Overall, a strong vote of confidence for the csm to lng sector.

I hold STO, BOW and DTE.

[macduffy]

FID for the GLNG two train, 7.8 mtpa project announced!

Not unexpected but a great boost for Queensland and the csm sector generally at this difficult time.

[macduffy]

Amid today's gloom, a good result from Santos!

http://www.theaustralian.com.au/business/mining-energy/santos-profit-tops-forecasts/story-e6frg9df-1226117949444

[winner69]

Amid today's gloom, a good result from Santos!

http://www.theaustralian.com.au/business/mining-energy/santos-profit-tops-forecasts/story-e6frg9df-1226117949444

and the paper says Santos shareprice falls to a 3 year low

Santos always been 'disliked' by the markets - 'disliked' meaning punters rarely show much enthusiam for it, esp relative to Woodside et al

[winner69]

mind you looking at both STO and WPL charts relative performance has been about the same .... and both not much of an investment over the last 3 years

[macduffy]

The Australian reckons concern about future energy prices outweighs STO's good profit result.

http://www.theaustralian.com.au/business/profit-loss/santos-shares-sink-on-price-fears-despite-strong-result-and-positive-outlook/story-fn91vch7-1226118437087

[STRAT]

Hi Sparky.
Reckon you might want to be a bit more specific with your question/request.

[macduffy]

It's over two years since anyone had anything to say about STO. A good solid result today and the market saw fit to mark the SP up 3.4%. The profit wasn't that great but progress with the LNG plants and a new promising gas discovery seems to have done the trick!

I hold a few.

[Aaron]

What do people think of this as an investment proposal.
Morningstar values Santos at $18.00 even after recent falls in the price of petrol. So assuming they are taking care of the fundamental analysis.
If I were to buy in once the 60 day moving average crosses back above the daily price, is this ridiculous speculation? I have no idea about oil companies or the oil market and I am relying on Morningstar to get the fundamentals right and the 60MA line is to help me hold off buying until the whole petrol price thing settles down a bit. The size of any investment would be smaller as I view this as a risky and lazy way to invest. Commodity prices are usually a leading economic indicator and petrol and iron ore & even dairy prices might be a precursor to worse things to come. Views & Suggestions (other than DYOR) appreciated.

[BFG]

The first thing you have done wrong is listen to Moaningstar. Absolutely huge mistake. Huge contrarian indicator.

The second is that this is a massive falling knife and that oli/gas might not recover for years, unlike weeks/months most think.

Be VERY careful.

[DarkHorse]

I've also learned from experience not to trust Morningstar's analysis - brokers generally but them especially!
I lack experience in both oil/gas and airline investment, but I can't help wondering if there are some type of 'hedging' opportunities in investing equal amounts into shares in the likes of say Santos and Air NZ - assuming you believe they are both well-managed companies - given their inverse correlation in response to oil price changes. At a glance it looks like the former is priced for lower oil price expectations than the later. But as I say I haven't studied either in detail, or worked out the how to calculate the bottom line effect of each $ of change in the oil price...
Does anyone with greater expertise in this area think these musings have merit?

[BFG]

Darkhorse, why hedge with inverse investments when you could just rotate in/out when the tide changes? I know it's not for all but any one can follow the price of oil and buy/sell accordingly.

[Westboy]

Avoid/Short........capital raising is certain. Morningstar valuation will take some time to reflect the current move in oil. Oil wont see $100 a barrel for at least 5 years. The LNG plant wont make a decent return on capital anymore because the LNG price is linked to the oil price (admittedly with a floor at $60)

The hedge funds that shorted it this week have it right!

[Aaron]

Avoid/Short........capital raising is certain. Morningstar valuation will take some time to reflect the current move in oil. Oil wont see $100 a barrel for at least 5 years. The LNG plant wont make a decent return on capital anymore because the LNG price is linked to the oil price (admittedly with a floor at $60)

The hedge funds that shorted it this week have it right!
Maybe I should use a 120day moving average to ensure all bad news is accounted for before doing anything.
Maybe I should try this with Newcrest or Kingsgate although whether its the price of oil or gold I have little idea where the price of these commodities will be in a year or two. Which makes it speculation. But is speculating on rising oil and gold prices in a time of low interest rates and central bank money printing in the hope of kickstarting inflation an unreasonable or silly strategy.

[NZSilver]

Depends on how linked they are to the US - since the central bank has stopped printing money and they will soon be raising interest rates (maybe sooner than expected after the latest jobs data there!). Those higher interest rates will feed through into other countries borrowing costs (especially Australia since pretty much all their funds come from offshore). One thing I've learnt, you can never predict the future price of a commodity - even those that do it for a living got the price of coal, iron ore, oil etc totally wrong a year ago.


too right KW - add to that dairy (banks used a $6-$7 payout for this years budgets), many were saying it will never again go below $7, now its around $4.50. I'm sure people were calling the end of oil below $100 a few years ago. Things can change quickly that's about all the forecasting you can do.

On Santos, I would like to know there ave cost of production, along with WPL - wood side and BPL - beach (according to one article beach is $25 per barrel so still plenty of margins). Its surprisingly hard to find this info, or I must be looking in the wrong place.

[Beagle]

Not sure why you think Air NZ is going to benefit from lower oil prices. The oil price is reduced for ALL airlines, so any financial benefit gained will be temporary as competition between airlines for passengers will simply see lower ticket prices. It only takes one airline to drop their fuel surcharge or lower fare prices and the others all have to follow. What a lower oil price will do is reduce AIR revenues - from lower ticket prices and scrapping of fuel surcharges. Airlines that have been relying on their "fuel surcharge" to inflate profits and subsidise other parts of their business could be in big trouble.
With respect this seems a simplistic argument and assumes it a homogenous product with no material difference in the service standards or product offering. You also completely discount Kiwi's strong propensity to be a parochial bunch and fly their own national airline. Half of all flights taken on Air are by Kiwi's flying on their own national airline. If what you suggest had real merit then the recent rally in Air's SP is well over-done, something I completely disagree with. How do you also explain the rally in many of the American carriers this year, most up well north of 50% (post fears of Ebola spreading out of control and the recent substantial oil price decline)...investors all around the world can't all be wrong. Maybe, just maybe, most carriers are sick and tired of earning an unacceptably low ROE over the long haul. Latest evidence from the States is carriers are actually raising fares despite the oil price declines.


Maybe I should use a 120day moving average to ensure all bad news is accounted for before doing anything.
Maybe I should try this with Newcrest or Kingsgate although whether its the price of oil or gold I have little idea where the price of these commodities will be in a year or two. Which makes it speculation. But is speculating on rising oil and gold prices in a time of low interest rates and central bank money printing in the hope of kickstarting inflation an unreasonable or silly strategy.
Santos is one I have my eye on and is highly sensitive to the falling oil price and contrary to advice you've received I think it is an excellent hedge for a shareholding in AIR.
I'd highly recommend you take a patient approach as the oil price fall could be quite protracted and its effects quite severe for Santos. I'll be using a 180 day MA, available on direct broking super charts menu for a safer point to time my entry in due course.

[Beagle]

Its price elastic to a point and your illustration is based upon the Australian situation which has had a serious over-capacity issue for many years. As my engineer friend found out recently when he had to fly one of the Chinese airlines you definitely get what you pay for which is their case isn't much. Really, really small seats that even an average sized Kiwi bloke would feel he was squeezed up worse than a battery hen, very small meals, hostesses that can't speak English, not even any flight announcements from the Captain.

There's no basis for the competition regulator to look at domestic fares in N.Z. Chris Luxon is on record as saying they're cheaper than they were 5 years ago. The imminent withdrawal from several routes proves there's far less money in many of the routes than some people think.

The US economy is doing well and more income does equal more travel. One of the main themes I'm playing is the affordability of air travel. It cost about 2.5K for a quality airline return flight to London 30 years ago, 20 years ago, 10 year ago and presently. What other product do you know of that hasn't changed in price in 30 years ? Air travel is dirt cheap for what you get. I saw $39 to Wellington this morning on special on grab a seat.

I think you'll find there's limited interest in Australasia in dropping prices, why would they. Ticket prices are already dirt cheap for what you get if you book ahead on special. Most of the airlines have made woeful returns on their investment over the medium term. Just look at the Qantas result last year, what was it $2.8 billion loss from memory ? If they're forced to drop fuel surcharges I'd expect airfares to increase to compensate.

Cartel ?, well we have the freight cartel case and many airlines were caught, AIR N.Z. wasn't one of them. Pretty hard to catch train or drive from Auckland to London :)
Seriously, if you have to travel anything more than about 300 km's, who can be bothered driving or catching a train or bus, takes too long. Product substitution, I 'm sorry, I really don't think so.
AIR is on a forward PE of only 8, growing EPS this year by circa 20-30% and are on record as saying their 2H profitability will be seriously enhanced by the recent drop in oil prices. I expect super profits for 2016 and possibly 2017 if oil prices stay where they are and Santos a great hedge position when there's blood on the floor.

[Beagle]

Got Mainfreight too. Seen Qantas' share price recently. Try telling those shareholders the fuel price isn't helping !!
SP nearly over-taken AIR's today which is a ludicrous situation when you consider AIR's earnings, track record and fleet position. Just bought some more AIR putting my money where my mouth is :D

[Beagle]

Probably everyone without a business/economics degree assumes that low oil prices will benefit airlines and have rushed into buying airline shares. But anyone who understands game theory and the laws of supply and demand in price elastic industries, will know that a low oil price is not the golden egg it seems. Airlines have an amazing ability to self-sabotage - history will repeat :D

One thing to watch out for is Jetstar on the trans-tasman route. At present they are flying very little, with only one flight a day into Chch and Auckland, whereas they used to do 2 or 3. So that will probably be the first place they will add capacity, and those planes will also add to capacity on the Auckland, Wellington, Christchurch routes as they fly them domestic in between international flights.

You didn't notice that AIR won the Deloitte company of the year did you ? C.L. doing a superb job and well backed by a very competent board. New Dreamliners with a top flight experience. Jetstar's planes and service are absolute rubbish. You only have to fly them once and never again.

[macduffy]

Suddenly, the STO thread transforms into (another) AIR thread!

:eek2:

[DarkHorse]

From today's NZ Herald "Oil dip lifts airlines". But I can see your point KW - it's far too simplistic - and most journalists have no clue about economics. Profitability certainly depends on competitor behaviour and price setting, as well as elasticity of demand and excess capacity. In a similar vein retailers don't seem to have benefitted from the high NZD. Pairing freight and oil/gas investments warrants looking into.
I shouldn't post on a Sunday afternoons - always in a vegetative state :)

[winner69]

Credit rating cut .... share price down

http://www.smh.com.au/business/santos-shares-fall-after-credit-rating-cut-20141209-1235u3.html

[Beagle]

Credit rating cut .... share price down

http://www.smh.com.au/business/santos-shares-fall-after-credit-rating-cut-20141209-1235u3.html

Its really getting smashed isn't it !!!!
I reckon this is a very good stock to buy when the street is flowing with blood in due course. A lot of patience required as all the risks are well and truly to the downside at this stage. Plenty of short opportunities on this listed on the ASX too for those that don't like the airline play.

[Westboy]

They have to raise capital....Market cap is getting close to debt levels. That is usually a big warning sign

[macduffy]

Its really getting smashed isn't it !!!!
I reckon this is a very good stock to buy when the street is flowing with blood in due course. A lot of patience required as all the risks are well and truly to the downside at this stage. Plenty of short opportunities on this listed on the ASX too for those that don't like the airline play.

Yes, it's very much on my watchlist.

Interesting to note that with the weakening AUD, Tapis is still around AUD$88 at current prices and with STO's big interests in domestic gas markets a big chunk of their business is largely unaffected by oil prices.

[Beagle]

Yes, it's very much on my watchlist.

Interesting to note that with the weakening AUD, Tapis is still around AUD$88 at current prices and with STO's big interests in domestic gas markets a big chunk of their business is largely unaffected by oil prices.

Yes. With the Russians signing new deals for their gas with China recently Europe is looking at a major problem in due course with getting sufficient energy. Won't this be great for international prices of LNG ?
But what about the cost to ship it there ?

[macduffy]

Santos to reduce 2015 capital spend by 25% and says there is no need to raise additional capital.

http://www.asx.com.au/asxpdf/20141211/pdf/42vdpv1w60c80r.pdf

Hasn't stopped the slide in the SP however.

[Westboy]

Santos said the company has no present need or intention to raise equity.

Shakespeare said.

I think she doth protest too much.

[macduffy]

Not equity, but Santos has announced that it has arranged an additional $1b bilateral bank loan from ANZ.

"Bilateral" loans are a new term to me but it seems that it is applied when the loan is by one provider rather than a syndicated facility. But you all knew that!

;)

[Daytr]

Is this additional debt? What other debt do they have?

[macduffy]

Yes, over $6b at last half year balance date. But then, they're a big company by local standards - M/cap over $8b, even at current depressed shareprices.

[Daytr]

Ok & sitting on about $2Bln of cash so net debt of $4Bln. That $6Bln is AUD?
What do you think they are making profit wise at current commodity prices? Just ballpark.
I actually looked at shorting them yesterday but after some reading I changed my bias.
I'm not sure about gas & where that goes.
I think long term it will do well as cleaner alternative to oil.
But short term there is a glut.
With the sell off in oil overnight, a buy opportunity might present itself.

[macduffy]

I wouldn't hazard a guess at current profitability, Daytr.

As I see it, the two big components of STO's business are, firstly, the growing LNG operations, with interests in Darwin, PNG - both producing; Gladstone - due to come on stream next year; Bonaparte - still on the drawing boards. Secondly, the strong position in the domestic gas market in Aussie where prices are less affected by international oil prices. I think it's only a matter of time before the SP rebounds somewhat, but I'll wait for the market to give some signals.

[Daytr]

Yep tend to agree macduffy thanks.
I must admit I'm a bit mixed on the outlook for gas with so much coming on stream.
However then due to the shift to cleaner fuel gas will replace more & more of crude based fuel demand.

[macduffy]

More LNG, potentially, on the drawing boards in Australia as "agreement" is reached by partners in the Equus project. But Final Investment Decision not expected before 2017. Note also, that STO's Bonaparte project remains firmly on the back burner.

http://www.theage.com.au/business/new-7-billion-offshore-lng-project-looms-for-wa-after-hessnorth-west-shelf-deal-20141223-12czc1.html

[h2so4]

Yep tend to agree macduffy thanks.
I must admit I'm a bit mixed on the outlook for gas with so much coming on stream.
However then due to the shift to cleaner fuel gas will replace more & more of crude based fuel demand.

Woah! Huge price drop from the peak in 2008 some 75%. Reminds me of some other commodity.

[Daytr]

Bought in today on the selloff, looking like good value here, but then again I would say that wouldn't I.
I really can see oil being sustained at these levels for long.
Production cuts will start kicking in.

[BFG]

I'd wait for a test of $50 per barrel before buying oilers. Its already plumbed new lows last night, why not be safe and wait for a true bottom?

My favourite saying is: "Just when you think it can't go any lower, it almost certainly will!". Thought we would have learnt that lesson with goldies by now eh Daytr? ;)

[macduffy]

They're my thoughts too, snapiti.

But it's the different views in the market that makes the market, isn't it!

;)

[NZSilver]

oil price down again - I would wait until things settle, could easily pass through 50 towards 40. Remember Saudis cost of production is about $3/barrel so they can push things further if they want.

[Daytr]

Well the fact that producers in some parts of the world are losing money at the current price of oil says to me there will be production cuts imminently.
Producers in the mid-west of the US are now receiving around $35/bbl and losing a lot at that price. Fracking permit applications were down 15% as at a month ago.
Saudis costs are cheap but not $3/bbl, my understanding is that its somewhere between $10-20/bbl.
However they need to receive a lot more than that to finance their budget in fact a few banks have suggested that around $60/bbl.
However its not really the Saudis production that is hurt at these levels, its the likes of Venezuela and US marginal production among others.
What I think we will see in the medium term is WTI return to a premium over Brent as US production is either curtailed due to price or their export capability increases on a higher price.

[Daytr]

The other thing I would say is both you two seem to have changed your tune from only two weeks ago. Capitulation?
Oil is down since then obviously.
I certainly wasn't willing to buy on that recent spike of around 50c, so waited, but that means you are buying when current holders are suffering or turn negative. That's typically when I buy.
Either way its all arbitrary as it will come down to the price of oil.

[BFG]

My tune hasn't changed either!

[Daytr]

Wasn't really referring to you BFG.
Brent forward curve is suggesting it wants to trade higher imo probably around $65/bbl.
AUD should continue its decent in 2015.
Should bode well for better prices for STO in the coming months.
Q4 quarterly will obviously be an interesting one considering what we have seen in oil recently.
The ANZ facility gave me a confidence boost in STO as the would have done extensive due diligence & modeling off very conservative prices.

[BFG]

Oil down to new lows in the $52s now. $50 is coming up hard and fast. Better pray it holds if you are an STO holder. Can't see it happening though with Iraq and Russia announcing ramp ups in production...

[Daytr]

BFG if you are discussing the oil price impact on STO best you look at the Brent price not the WTI price.

[BFG]

BFG if you are discussing the oil price impact on STO best you look at the Brent price not the WTI price.

Does it really make that much of a difference? One has a premium and is the same commodity. Sure it matters for FA but the trend sure as hell isn't your friend right now, and neither is the macro picture.

[h2so4]

Does it really make that much of a difference? One has a premium and is the same commodity. Sure it matters for FA but the trend sure as hell isn't your friend right now, and neither is the macro picture.

You might want to keep an eye on the price of gas as crude oil only make up 5% of STO sales.

[Daytr]

Even better point.
H2so4, what reference do you use to monitor price of gas for the likes of Santos?
Any good price reference sites?

Cheers Daytr


You might want to keep an eye on the price of gas as crude oil only make up 5% of STO sales.

[h2so4]

http://www.kitco.com/finance/futures/

[h2so4]

You might want to keep an eye on the price of gas as crude oil only make up 5% of STO sales.

Make that 26%.....sorry about that chief.

[Corporate]

LNG will make change the production mix substantially and my understanding is that this is oil linked. Although I imagine there is some floor...not sure

[h2so4]

LNG will make change the production mix substantially and my understanding is that this is oil linked. Although I imagine there is some floor...not sure

I suspect you are right. Crude oil makes up 5% of their proved plus probable reserves as at 3013. Crude oil reserves declined 14.8% on the year.

[Daytr]

When I was looking at hedging some of these projects back in 2011/12 we were going to use the Brent curve however I think there was some formula rather than it being a direct. There was talk about creating gas futures etc as there was so much coming on stream, however I'm not sure that has come about.

[Daytr]

Its difficult to understand what price STO will be getting for the natural gas for the domestic market as gas prices can differ substantially by location.
In regards a price floor there was always talk in regards funding these massive projects that there might be floors agreed, however I'm not sure if that's definitely the case.

[Corporate]

Looking at the last half yr report $1b out of $1.6b of the revenue was from oil.

[h2so4]

Looking at the last half yr report $1b out of $1.6b of the revenue was from oil.

Or 28% sales volume slightly higher than the 26% due to lower gas customer nominations.

[Daytr]

Flicked my holding out today on the highs.
It looks like ok value here, but I get the feeling we may see better.
Will be watching for a re-entry point

[BFG]

Good thing you did mate, oil sub $50 now

[Daytr]

Yes & Brent that actually counts was down harder just under $54/bbl.
The difference between the two at current prices equates to around A$250M in revenue BFG and has been as much as $1.5Bln in revenue so it pays to look at the right marker.

[BFG]

We all know it's all about the Americans though ;)

[Daytr]

Wow STO smashed down 8%!
Basically $1bln off the market cap $800M to be precise.
Relieved I took profit yesterday.

[BFG]

Wow STO smashed down 8%!
Basically $1bln off the market cap $800M to be precise.
Relieved I took profit yesterday.

Lucky, lucky man right here!

[Daytr]

Yes indeed, should be down further again today as well by looks with oil down again.
Gas really needs its own Asian marker.
With the amount that will be produced & consumed in the region you would think this is justified.
More & more industry will switch to gas from coal & diesel due to emissions going forward creating a bigger divergence one would have thought.

[macduffy]

Here's an extreme view on the worth - or lack thereof - of STO shares at current oil prices. A bit more panic and they'll be worth buying!

http://www.theage.com.au/business/santos-shares-worthless-at-current-oil-price-broker-says-20150107-12jahi.html

[Aaron]

Here's an extreme view on the worth - or lack thereof - of STO shares at current oil prices. A bit more panic and they'll be worth buying!

http://www.theage.com.au/business/santos-shares-worthless-at-current-oil-price-broker-says-20150107-12jahi.html
Thanks for the article. I wonder how often Morningstar review/revise their recommendations. Glad I have learnt some patience from past disasters.

[macduffy]

The article is not an extreme view

"Extreme" in that the market values STO at $7.45 - today!

;)

[dingoNZ]

At current levels I'm tempted to take a punt a put STO in my bottom draw and come back in 3 years and see what happens. They have just been granted a debt facility and analysts believe they will not require to issue equity. Outlook in the ST is grim, however in the med/long term its not so gloomy

[macduffy]

At current levels I'm tempted to take a punt a put STO in my bottom draw and come back in 3 years and see what happens. They have just been granted a debt facility and analysts believe they will not require to issue equity. Outlook in the ST is grim, however in the med/long term its not so gloomy

Personally, I'd wait until the SP bottoms - or the company folds! As has been noted, their credit rating must come under further scrutiny as the PoO drops, making debt servicing more expensive and further funding harder to obtain. Things will probably get worse before they get better.

[BFG]

Morningstar latest valuation is based on the average price of oil being $90 for the year

Moaningstar - always last out the gate and the greatest contrarian play of all time. :)

[h2so4]

Here's an extreme view on the worth - or lack thereof - of STO shares at current oil prices. A bit more panic and they'll be worth buying!

http://www.theage.com.au/business/santos-shares-worthless-at-current-oil-price-broker-says-20150107-12jahi.html

Asset
Proved reserves 620mmboe from reserve statement 2013
Guessing 5% oil and 95% gas
31 mmbo @ $ 51 = $ 1.6b
561mmboe gas = 3288 million GJ @ $6 = $19.7b
Total proved reserves = $21.3b based on prices in the article


Previous post deleted to save any confusion

[Daytr]

It just says to me something will have to give in regards energy prices.
Gas demand is growing where as oil demand is roughly stagnant.
However a lot can happen between now & then.
I actually bought back in today at $7.29.
One thing is for sure. Credit Suisse wont be visiting STO offices for a while!

[Daytr]

Ahh think you might be confusing credit rating agencies with banks.
I don't think you can downgrade below a 'SELL' recommendation.
Maybe 'DUMP'
Anyway I chickened out just now & what do you know, its the highs for the day so far. ;-)

[dingoNZ]

Sell is the lowest recommendation correct, they just lower their target price

[Beagle]

Just had a quick look at the Brent futures for Dec 17 and Dec 18. $71 and $74 respectively
Futures haven't come down much since I last looked a few weeks ago despite the front month contracts being under enormous pressure.
From a technical perspective I think there's very serious downside risk to the SP in the short term. I remain happy to wait for a new uptrend to be confirmed by a clear break up through the 100 day MA which could be many, many months or even a year or two in the future from here....or perish the thought, may never happen

[Daytr]

Just gone on trading halt as drilling results about to be released.
Yeah the forward curve was similar in 2008 when oil got smashed.

[Westboy]

Asset sales flagged today! but yesterday they had enough liquidity to survive until the LNG plant was scratching out a merger profit!

They have to actually completed the LNG pipeline before they can sell it and they best and only Australian buy was romanced by British Gas........The ACC wont let APA buy a pipeline that runs right next to a competitor IMHO. That said, we are getting ahead of ourselves, they have to actually finish the pipeline before they can sell it, which is still 4-6 months off

This company has had a seriously poor track record for allocation of capital!

Capital raising is certain and given management have been slow to react to what was obvious it will be at a very low price IMHO!

[Daytr]

I shorted this morning on the rally. I've changed my view on oil in the last week or two, agree it can go a lot lower still & stay there.
The main change for me was around the hedging in place by the US fracking industry so the lower prices are going to take a lot longer to filter through so the Saudis will wait it out imo. Venezuela, Russia & Iraq all need to keep pumping so its the high cost fracking that imo is the most vulnerable as I have always thought but the hedging means its going to take a while to see production cuts.
I have been hearing that oil has been supported lately by index rebalancing at the end of each US trading session & that's why we have seen crude pop up toward the end of each day. That doesn't have much longer to run.
So basically as many are calling for & I agree oil can go below $40 & stay there for a while if OPEC want it to & I think they do.

[Daytr]

Thoughts on the quarterly folks?
Seemed pretty reasonable to me, but right at this point at the current price of oil I think STO are losing money.
So the current quarter is going to be substantially worse than the last if oil prices stay around here or get worse.

[macduffy]

Thoughts on the quarterly folks?
Seemed pretty reasonable to me, but right at this point at the current price of oil I think STO are losing money.
So the current quarter is going to be substantially worse than the last if oil prices stay around here or get worse.

The current quarter will certainly not be as good as the last but I'm not sure that STO is losing money. Revenue from sales gas, ethane and gas to LNG totalled $557m, a good proportion of which is sold under contract not currently subject to the POO - or so I understand. The vulnerable bit is the crude oil revenue, last quarter $385m and diminishing rapidly with only the weaker AUD to provide a measure of relief. A break-even quarter would be a good result?

Later:
The expected asset write-downs will almost certainly result in a big accounting loss eventually.

http://www.theage.com.au/business/mining-and-resources/santos-shares-jump-on-record-sales-report-but-writedowns-loom-20150123-12wl8s.html

[Daytr]

I think it is directly associated to POO, well at least the export contracts.
The domestic gas I suspect you may be right.
If for example that all revenue was directly related to POO I work out that sales revenue would have been A$470M lower using the current prices versus what they would have received last quarter. When I say making a loss that's after capital expenditure of A$500M per quarter that's forecast for 2015 as well.

The weaker Aussie is actually worse for STO due to their level of US debt.
In last years financials they said a 13c move lower had a negative impact of A$22M on EBIT.

[BFG]

...all revenue was directly related to POO...

I'm sorry, I couldn't get past that line. That is all :D :D :D

[Daytr]

Ha ha Moose. For some shareholders it probably feels exactly like that!

[Daytr]

Back short again this morning. Oils 6% bounce on Friday I think was just a good clean out of shorts at end of month.
I think oil now moves another leg lower.

[Schrodinger]

Missed out on this @$7 will look to enter another time..=(

[Daytr]

Don't worry you will get another chance at $7 & $6 and perhaps $5 & $4... ;-)
From Bank of America on oil.
Seems there is no let up from OPEC in regards production.
I don't think BOA are quite as bearish as they were as they were calling for $31/32 oil.
I think we will see $40 or there abouts.

OPEC production estimates from Bloomberg, January

Bloomberg (BBG) estimates are gathered by surveys. Although we consider IEA estimates to be more accurate, these may serve as an early indicator of direction and, to a lesser extent, magnitude of changes to OPEC-11 production.

Iraqi production surges to all time high and Saudi dials up production

Bottom line:


OPEC-11: 27.01 million b/d, +0.28 million b/d MoM.
Saudi Arabia: 9.72 million b/d, +0.22 million b/d MoM.
Iraq: 3.90 million b/d, +0.20 million b/d MoM.
Iran: 2.78 million b/d, +0.01 million b/d MoM.
Nigeria: 2.04 million b/d, -0.04 million b/d MoM.
Angola: 1.81 million b/d, +0.19 million b/d MoM.
Libya: 0.30 million b/d, -0.15 million b/d MoM.


Key points and why it matters:


OPEC-11 crude oil supply increased in January on strong growth in Iraq, Saudi, and Angola, partly offset by a decline in Libya. Meanwhile Iraqi production rose very strongly in January, which brings OPEC11+Iraq crude oil production to 30.9 million b/d, the highest level since October last year.
Saudi Arabia boosted production to a three month high of 9.72 million b/d, as the country seems intent on shutting down US shale oil production growth. The head of Aramco said on Tuesday that Saudi is now pumping 9.8 mn b/d, slightly higher than the estimated January average. As Libya started to ramp up oil output since the start of last year, Saudi Arabia failed to react, breaking with the pattern seen in the preceding 3 years since the Arab spring started. The outcome of the Nov 27 OPEC meeting makes it clear that Saudi has now changed its policy, from one of keeping oil price high and stable, to one of “letting the market re-balance itself” by forcing a slowdown of non-OPEC production growth. Hence we see OPEC-11 production steady in 2015 and a significant increase in Iraqi growth over 2014 levels.
Iraq production rose to an all-time high of 3.90 million b/d in January, up 0.2 mn b/d MoM, as production and exports in the North are surging. North saw a surge in production and exports due to the recent (on 2 Dec) struck and long awaited deal between the Kurdish Regional Government (KRG) and the central Baghdad government on sharing of oil revenues. This deal allows the KRG region to step up its exports and therefore production. It also allows the KRG to export oil from the Kirkuk field which was previously operated by and under control of the central Baghdad government until a pipeline attack in March last year.
Libyan production dropped to 0.3 mn b/d, the lowest monthly average since May last year. Production was briefly running at 1 mn b/d in November before fighting broke out in early December, forcing a shutdown of key oil export terminals Es Sider and Ras Lanuf which have combined capacity of 560 k b/d. The resurgence in violence affecting oil exports is related to fighting between the two rival governments, “Libya Dawn” based in Tripoli and the official government based in Tobruk. Going forward Libyan production will likely remain volatile as infighting among various fractions over control of the county’s resources continues, and hence could result in further production outages. Production above 650 k b/d near term is unlikely, according to the IEA, unless the recently damaged oil tanks at Ras Lanuf / Es Sider terminals are repaired. And even then the maximum production capacity would likely be 1.2 mn b/d (vs. 1.6 pre-war) as further production capacity requires significant investments in fields and infrastructure.


Global Energy Weekly: Battle of wills for oil suppliers
· Medium-term global oil supply will be heavily impacted by lower prices due to capex cuts and accelerating field decline rates
· We pare our prior non-OPEC medium-term projection for 2018 by 1.5m b/d on lower US shale, Canada and Russia output
· OPEC supply may rise by up to 6.7m b/d in the next 5 years if Saudi, Iraq, Iran, and Libya ramp up output to maximum capacity

[Daytr]

PSE, I think you are right & long term STO will be quite a bit higher than where it is now.
In saying that I think you are being optimistic that STO SP is being priced of $50 oil.
It basically has a MC of A$8Bln which implies a profit at least of A$500k & more likely A$750k.
However currently it will be lucky to be breaking even.
STO has very large on-going capex costs, this year I believe its A$2Bln they will be spending & that's down considerably on what they were going to spend. I would suggest STO SP is currently being priced of around $65-70/oil.
The key is the large amount of debt & if oil goes substantially lower still or even stays at around these levels for a substantial period of time STO's ability to service debt will come into question.
They can obviously raise capital etc & I think they should or at least suspend dividends & repay as much debt as possible.
What do you think the SP will look like if we have a whole quarter of prices like this?
If oil prices are still low & they report a shocking quarter & have write downs etc then watch out below.
Oil is obviously highly geopolitically geared, but not as much as it once was, however obviously anything can happen in between now & then.

[Daytr]

I'm of the view the oil market has changed & unless there is some sort of supply disruption which is possible, oil is to stay low for a lot longer.
Economically in the long term this is a benefit. However for those who borrowed to build assets on much, much higher prices this will cause problems as we are about to see in the US & elsewhere. I still believe this is a supply war of attrition & its about market share & pumping as much oil as possible because it wont be long before the world is weaned off oil. Its going to be a necessity in a reasonable short time frame.

This is a well thought out piece on Saudis motivations around production & the oil price.

This article sums it up nicely.

http://www.energypost.eu/historic-moment-saudi-arabia-sees-end-oil-age-coming-opens-valves-carbon-bubble/

[Daytr]

I think you have missed the point, perhaps not.
Its not the Saudis that are trying to get the world off oil, quite the opposite.
Lowering the price is the best way to combat alternative energies, purely on economics.
Toyota fore example is due to roll out a production hydrogen powered car this year.
This oil shock must have caught them wrong footed, all the expense on R&D etc.
However I also think the Saudis realize the end game is near as oil will be unpalatable in the years to come, so again pump as much now & don't give up market share to other higher cost producers be them US, Russia or other OPEC members.

[Daytr]

Crude smashed overnight.
US crude stocks build twice forecast at over 6M bbls.
Refined product stocks also grew.
US stocks now at 30 year highs.

[dingoNZ]

If you're confident in STO, today may be a good time to buy in

[Daytr]

Agree added to my short yesterday at $8.57

[Daytr]

Agree about shorting oil.
That's why I am short Santos
STO has oodles of debt which could hurt them & in USD which is also hurting them as the Aussie falls.
But mainly STO I believe is being priced off much higher oil, like $20/bbl than the current price so if we do see oil stay low for the next few months that debt will start to weigh as cashflow deteriorates.
However if oil goes lower still like to $40/bbl which I think is quite feasible then you will see STO much lower.

[Daytr]

I re read STO reports over the weekend & it re-affirmed my view.
These guys are in trouble unless the price of oil picks up & picks up quite dramatically.
I would suggest they are currently losing money, obviously if oil goes lower that gets worse & that debt becomes an issue.
Its all about the price of oil, short & simple.
Higher, then no issue I just can't see the Saudis taking the foot of the US shale throat until its throttled.
Lower, then all sorts of issues become exposed particularly in regards their ability to service debt.

[Daytr]

No of course not that's the whole idea of this forum.
A couple of points.
STO imo is basically a USD denominated company as they have a large portion of debt in USD.
I'm not sure of the sensitivity, however its possible a weaker AUD is a negative for them.
I agree worse case scenario & I don't see STO going bust, its possible, but I doubt it as well, as they have options.
However I do see the very real possibility of questions raised over serviceability of their debt if we see oil staying low.
If oil prices hang around $45-55/bbl for Q1 its going to be a shocker.
They have also the very real possibility of credit downgrades & large asset write downs.
They could obviously raise capital if required but this would obviously hurt the SP as well.
If oil bounces, then this will just be a blip & a great buying opportunity.
I'm just of the camp we are going to see another leg down in oil & this is what I call a suckers punch rally.
SP hasn't done much today considering the rally in oil on Friday.

[Daytr]

A lot of their gas is linked to oil, however their domestic gas I don't think is, but that's likely to change.
I can see eventually an Asian gas contract being established rather than any link to crude, but that's a while off yet.

[macduffy]

Only small bikkies, perhaps, but completion of the PNG LNG plant releases cash to the project partners, including STO.

http://www.asx.com.au/prices/market-news-detail.htm?an=DJCOMM1120150205eb2500wt9

No ASX announcement from STO so probable that STO don't participate in the Exxon deal but good news nevertheless that the project has completed.

[Daytr]

All helps.
STO underperformed yesterday when oil was up.
Its up again, but I see resistance at $60 for Brent & $55 for WTI, so if oil is to head lower again its probably from there.
I shorted Brent just above $60 this morning.

[Daytr]

Citi put out a call this morning for $20 oil!
Headline grabber & I'm sure that's what its about.
Lets not just be bearish, lets be the most bearish!
Bank of America were calling for $31/32 oil but have softened their tone recently.
I still think we will see $40 or perhaps sub.

http://www.cbc.ca/news/business/oil-output-still-growing-as-citi-predicts-a-drop-to-20-us-a-barrel-1.2950573

[Daytr]

STO has dropped over 50c since its recent highs & that's when the poo was rising.
Poo thumped overnight, so it will be an interesting day for STO SP.
IEA came out with a stockpile estimate of 2.83 BILLION bbl by OPEC by mid 2015!

[Joshuatree]

PDF (http://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=pdf&idsId=01598313) non cash impairment charge of $1.6 billion. Im out of my depth.

[macduffy]

PDF (http://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=pdf&idsId=01598313) non cash impairment charge of $1.6 billion. Im out of my depth.

No surprise that STO have had to recognise the lower values of those assets but the extent of the write-downs may surprise the market. We'll know shortly!

[macduffy]

No surprise that STO have had to recognise the lower values of those assets but the extent of the write-downs may surprise the market. We'll know shortly!

STO's shareprice is down around 14c. Significantly, they didn't make any writedown on their $24b GLNG project - this may be weighing on the market as a potential further hit if energy prices don't recover.

[Daytr]

Macduffy just to be pedantic STO own 30% of the GLNG project & to value it at $24Bln in the current climate is being generous imo.
I think the 1.6Bln is about 10% of assets from memory & is a reasonably conservative number, i.e. it could have been worse.
The next major announcement is the divi. Will they maintain it at 20c?
I think they will, they shouldn't but they will.
Crude oil stocks up again ahead of forecast last night in the US.
There seems to be a bit of a battle going on at the moment between bulls & bears on oil, so that's a reasonable sign in itself as there were no bulls a couple of weeks ago. Still think the bears will win out, but there maybe some gyrations in between.

[macduffy]

Yes, I think it's the current climate that's worrying investors when STO doesn't take any writedown of the book value of this project! $24b is the "value" of the entire project of course and it may be that they are constrained from a unilateral revaluation of their portion without affecting the other partners?

[Daytr]

Right. I heard that as well but yet to see it confirmed.
I actually went long yesterday on the opening lows as I suspected it would bounce so has worked out nicely.
Its a bit against my core belief that ultimately STO is going lower overall, but I think they will retain the dividend & while that's loomingbI don't want to be short. Should be a good day today with poo rising.

[PSE]

It would be nice to own a company which wasn't evil but there aren't very many unfortunately.

[macduffy]

Has STO got it's rose coloured glasses on in making this big assumption about the future POO to calculate its writedowns?

"The company said that in testing the carrying value of its assets, it "used future oil price estimates, which assume short-term market prices for four years, reverting to a long-term price of $US90 a barrel from 2019 in real terms. It assumed a US80c exchange rate for the Australian dollar”.

Anyone's guess, I guess!

;)

[PSE]

Its anyone's guess what oil will do in future, the revised estimates are more or less in line with what people who make a living out of guessing oil prices think.
What is for certain is the rose tinted glasses through which the speculators/traders saw Santos last year have been replaced by dark glasses this year. The sky has fallen in and all is doom and gloom.

[Daytr]

I think to be fair to management poo hasn't been low for that long & standard accounting practice would be to make write downs as prices are sustained lower, otherwise you are constantly making write downs & write backs. In saying that re GLNG I would suggest it would have been a very difficult pill to swallow for investors & lenders if you wrote down an asset that isn't even completed & only just about to come into production.
Generally I think the management of STO are pretty good, but these are challenging times & bring out the best or worst in people & decisions.
The divi will be interesting as they shouldn't pay one, but I think they will.
I updated my research on oil today & got even more bearish.
I've just re-entered my short on STO after having a very short term but highly profitable long position.
STO could go higher short term, but I'll just add to my short.
Will post something on the oil thread re my latest findings.
Cheers Daytr

[Daytr]

This link was posted on HC this morning.
Ouch!

http://www.wearecovepoint.org/gas-prices-fall-in-asia-is-dominions-investment-secure/

[Daytr]

Strong words PSE, I only wish I knew what fraudulent behavior you are referring to?

[PSE]

It would be fradulent for the directors to misrepresent the accounts to lenders and shareholders because they think is is a 'bitter pill' as you implied in your post.
Incidentally the most recent research from Craigs' backs up my thoughts on GLNG with a bit more detail.

[Daytr]

Well that's not what I said or implied.
Oil hasn't been down for that a long a time period so I think the impairment was about right.
They would have been within accounting standards,

[Daytr]

End of year financials released today & divi announcement.
20c will please the market obviously. No divi & SP gets trashed.
I think 10c.
There should also be a massive revaluation of their USD debt.
Its worth something like $1.2Bln conservatively.
Should be an interesting day !

[Daytr]

Divi of 15c & the SP tanled.
But I don't think it was the divi that they didn't like, I think its the realization that they aren't making any money or close to it & have $7.5Bln of debt!

[PSE]

Reports of oil storage filling up.
I don't like to gamble on the price of oil but if it falls for the next 3 months or so as expected we may find good buying for Santos as the shareprice falls - a chance for me to top up.

[Daytr]

Yeah watch out for a massive capital raising at some point.
They are going to have to do something about that debt & I oil goes a lot lower & stays there for a while, then that debt is going to become a major issue.

[Aaron]

Morningstar has chopped 1/3 off STO's value. Patience is paying off for me but the question remains when will oil and gas recover. Gary Shilling reckons the big up front investment has already been made in a lot of wells so they will just keep pumping as the cost to run the pumps is relatively low compared with the exploration and drilling costs, pushing prices down further. No need to get excited about STO anytime soon.
Still relying on Morningstar analysis for value but wonder if anyone more knowledgeable than me has a view on the value of this company as we all know the price.

[Daytr]

Oil heading much lower still imo, we are just seeing the start of the 2nd wave down. The storage trade I referred to temporarily propped up poo and now that trade isn't working due to storage capacity. I still have a price target of $4ish for STO.

[Beagle]

I am watching and in no hurry to buy. Oil lower for longer is where I see this. Plenty more pain to come.

[PSE]

I agree with Roger and Daytr more pain to come, just not as confident to predict the when of the recovery so I am keeping a dollar each way. I am not as concerned about short term volatility or market timing as I think this is inherently unpredictable.
I didn't see any of the analysts predict the oil price drop my analyst has STO a buy with a target price of around $12. Won't be a problem for me if it goes to $4 before going to $12 but if I was to speculate I would say that any nadir in shareprice will occur when US oil production peaks in June or July before starting to decline.
Anything around $7 is great if its worth $12 but if you can get it for less than thats ideal.
On the other hand they could sell some assets and the company could be revalued to what it is actually worth, this is the reason I am not keen to be out altogether. Lower oil prices have been factored into the recent writedown.

[Daytr]

The two main reasons why people didn't see this coming, although many forecast lower oil, not just an oil crunch.
Russian sanctions & a quite rapid slow down in Chinese consumption of raw materials.
China & many other parts of the world are switching to alternative energy in a meaningful fashion that means oil consumption is likely to drop jot grow in future, so it begs the question if oil prices will recover substantially & the likes of SPs lke STO with it.

[Schrodinger]

Ok im in @ 7.34 will steadily accumulate, hopefully at less than $7...

[Daytr]

Really? ok mate you stick with that. haha


http://www.statista.com/statistics/271748/the-largest-emitters-of-co2-in-the-world/
Yes it will recover as there is no evidence of a wholesale shift to renewables of the scale you are talking about Daytr so the only question is when. That I don't know - my crystal ball is clouded.
China overtook the US in 2007 to become the worlds biggest carbon emitter and since then have only been throwing more coals into the furnace.

[Daytr]

PSE, I'm not anti STO or trying to drive the price down. I just do a lot of reading from around the world & from what I see & read there is a real growth in transition to alternative energy. And in imho its only going to gather momentum. As for dividends growing, I think you are living in the past on that one. They will be struggling to repay debt let alone pay a dividend.

[macduffy]

The proposed Shell/BG merger has implications for STO's Queensland LNG interests.

http://www.theage.com.au/business/mining-and-resources/royal-dutch-shell-to-takeover-bg-group-in-mega-deal-20150408-1mglkh.html

[Daytr]

I agree I thing gas has a long term future as is a much better alternative to crude or coal in regards emissions.
Problem at the moment though is gas is price linked to poo.

On that poo both Brent & WTI are right up against fairly key resistance imo.
I have just re-entered my short position yesterday on the thought that resistance holds.

Just out OPEC increased oil production by over 800k BPD in March.
As mentioned previously this is a supply war & the Saudis want to win back market share & retain it & to do that they need to maintain a low poo environment.

http://www.reuters.com/article/2015/04/16/us-opec-oil-idUSKBN0N717L20150416

[Daytr]

STO quarterly released yesterday was better than I anticipated.
Higher domestic gas prices, higher production & lower Aussie all helped.
The offsetting of course is that debt will have grown in Aussie terms by around A$1.5Bln that is not mentioned in the report.
Considering its such a major move in revaluation I would have thought management should have noted this, otherwise they are displaying just one side of the story in regards the substantial move in the AUD.

[Corporate]

I haven't looked but I would have expected that STO could have hedged the U.S. Debt and therefore there is not met impact. Might be worth checking this in the annual report



STO quarterly released yesterday was better than I anticipated.
Higher domestic gas prices, higher production & lower Aussie all helped.
The offsetting of course is that debt will have grown in Aussie terms by around A$1.5Bln that is not mentioned in the report.
Considering its such a major move in revaluation I would have thought management should have noted this, otherwise they are displaying just one side of the story in regards the substantial move in the AUD.

[Daytr]

No it's not hedged, its USD for a reason good or bad as oil is a USD based commodity & they wanted a correlation to that.
The thought is GLNG is effectively a USD project & I suppose when the debt was put in place the AUD was rising.
It just displays the myopic approach of corporates.

[PSE]

Hence solid energies woes I guess, also govt loaded them up with debt.
Banks have egg on their faces with that one..

[PSE]

I haven't looked but I would have expected that STO could have hedged the U.S. Debt and therefore there is not met impact. Might be worth checking this in the annual report

Yes actually they have some sensitivity calculations. Good advice to read those annual reports noted Mr corporate.

[macduffy]

Meanwhile, STO's shareprice is up to $8 today. Nice profits on some recent buys - for some!

:)

[Daytr]

And shorts at this very level. ;-)
Just shorted Brent as can't see the Saudis allowing oil to recover & the shale production off the hook.
Looking to short STO again as well. Might wait to see if we get a bit higher first though.

[dingoNZ]

And shorts at this very level. ;-)
Just shorted Brent as can't see the Saudis allowing oil to recover & the shale production off the hook.
Looking to short STO again as well. Might wait to see if we get a bit higher first though.


i traded oil for a while, leverage hurts...

currently at its highs of 2015:confused:

Disc - holding STO

[Daytr]

Shorted today, so now short both Brent & STO.

Another reason why poo ain't going anywhere higher in a hurry.

http://www.bloomberg.com/news/articles/2015-04-23/u-s-shale-fracklog-triples-as-drillers-keep-oil-out-of-market-i8u004xl

[Corporate]

Shorted today, so now short both Brent & STO.

Another reason why poo ain't going anywhere higher in a hurry.

http://www.bloomberg.com/news/articles/2015-04-23/u-s-shale-fracklog-triples-as-drillers-keep-oil-out-of-market-i8u004xl

Both Brent and WTI up as I type, http://www.bloomberg.com/energy/

Good for us who have just bought STO.

[macduffy]

STO's partner Drillsearch reports another gas discovery in the Cooper Basin.

http://www.asx.com.au/asxpdf/20150504/pdf/42ybgpqr2hxlqx.pdf

SP reacts favourably.

[Corporate]

After reading the Chairmans address a few days ago I'm happy to be on the STO register. Plan is to hold this for the long term. 20 years of GLNG to come!

[Aaron]

What do people think of this as an investment proposal.
Morningstar values Santos at $18.00 even after recent falls in the price of petrol. So assuming they are taking care of the fundamental analysis.
If I were to buy in once the 60 day moving average crosses back above the daily price, is this ridiculous speculation? I have no idea about oil companies or the oil market and I am relying on Morningstar to get the fundamentals right and the 60MA line is to help me hold off buying until the whole petrol price thing settles down a bit. The size of any investment would be smaller as I view this as a risky and lazy way to invest. Commodity prices are usually a leading economic indicator and petrol and iron ore & even dairy prices might be a precursor to worse things to come. Views & Suggestions (other than DYOR) appreciated.

Morningstar valuation down to $12, price of oil on the rise, 120MA well and truly crossed with a share price at $9.10 it is a discount of 24% to morningstars fair valuation. Not sure what price of oil and gas this is based on. I guess I need to pull the trigger as they say but am not feeling confident. I guess that is the downside of using my lazy man's investment system, ignorance is bliss and maybe I will get lucky.

[Daytr]

PSE, nice work on your trade on STO. The quarterly was the deal breaker in regards regaining market confidence, combine that with a decent bounce in crude. Interesting comments you made though re meaningless market trends etc. Its the very reason why STO halved in value, so I would suggest ignore at your peril. The company accounts were ignored in the quarterly by the way, i.e. the massive increase in debt in Aussie terms. ;-)

[macduffy]

PSE, nice work on your trade on STO. The quarterly was the deal breaker in regards regaining market confidence, combine that with a decent bounce in crude. Interesting comments you made though re meaningless market trends etc. Its the very reason why STO halved in value, so I would suggest ignore at your peril. The company accounts were ignored in the quarterly by the way, i.e. the massive increase in debt in Aussie terms. ;-)

Australian media reports speculate that predators are eyeing STO, or components thereof and/or STO itself might be looking to divest certain assets. Either way, it's adding a bit of spice to the STO shareprice.

[macduffy]

Even now the speculation on a takeover is nothing concrete, how can you predict reliably what the market may speculate or focus on next?

Well, of course you can't! But the traders in the market like nothing better than a bit of juicy gossip to move the market - downwards today!

[Daytr]

There has been speculation since the massive BG deal also its pretty well known that STO were considering selling their GLNG pipeline to help reduce debt. Due to STO's current debt levels of around $9.5Bln plus market cap of around the same, its a difficult prospect I think to take out considering a premium would need to be paid. So effectively you are talking a value of over A$20Bln.

Very poor close Friday down 4.5%. I got short again at $9.13. $8.50 should act as a key support level as was a key resistance level on the way up.
But if it breaks, watch out below.

[Daytr]

Ouch! STO been smashed recently. Been short since $9.13.
There is a bit of support just here at $7.70, however, if that fails, key support is right down at $6.92.

[Aaron]

Still haven't pulled the trigger as I am a scaredy cat but read this today. Don't know whether to take much notice when it arrives in my inbox unannounced.

3 Things we learnt from our catchup with Santos Limited (STO)
Romano Sala Tenna, Portfolio Manager, Katana Asset Management

STO is polarising analysts, fund managers and retail investors alike. Consider recent research notes from 2 of Australia's largest brokers: one with a valuation/price target of $5.50 and the other $13 even! But of course with confusion and uncertainty lies opportunity. So with a sense of opportunity in mind we caught up with the company in Perth today. 3 (important) things that were confirmed: 1. STO believe that infrastructure assets are getting 'very good prices at the moment' and that these assets are 'cheaper to fund in someone else's hands'. Whilst there is a lot of gas to pass through the pipeline, we take this as confirmation that STO's clear preference is to sell this asset. 2. Fairview is a 'world class field'; company forecasts of 1 TJ/day are being well and truly exceeded with production consistently up around 2.3/2.4 TJ/day. 3. A placement remains off the table at the present oil price: STO have many levers to pull, and even at this deflated oil price will be able to generate solid Free Cash Flow (FCF) and begin repaying debt.

[Daytr]

Tend to agree with the article's points. I think some of the valuations are very lofty, but probably depends on the time frame.
I can see a much better future for gas than oil & I would like STO to invest in renewables as well.
Gas I think at some point in the next few years will break its price linkage with oil & that will be very positive for STO.
Short term I think we are in for further pain, but they have proven they can ware a pretty lw price environment, which is positive.
They do however need to reduce debt to de-risk.

[rbel038]

I bought in recently after considering the market has priced in the expected low oil price environment and GLNG about to start generating cash for the foreseeable future. With Capex dropping as these large capital projects exit commissioning and into production I see STO moving into more of an operations role for the next few years , similar to our current electricity industry.

[PSE]

I bought in recently after considering the market has priced in the expected low oil price environment and GLNG about to start generating cash for the foreseeable future. With Capex dropping as these large capital projects exit commissioning and into production I see STO moving into more of an operations role for the next few years , similar to our current electricity industry.

Daytr - I agree debt is high and I would like to see it reduce.
Rbel, I also like the company at these prices, however the hydro stations don't deplete so are worth more than STO which has to keep looking for gas (in the medium term) to stay in business.
I am in until the market sees the recovery then maybe I will take a profit and reinvest elsewhere. I would be happy with $13-17 for this one.

[Daytr]

Well here we are again back toward the bottom of the range & key support of $6.92 where it bounced off last time.
Rough and dirty it looks like STO should make around A$5-600M of free cash for 2015 if the oil price doesn't fall out of bed, which in my view it could still do. Unfortunately their debt has increased dramatically in AUD terms so I suspect they will actually report a substantial loss by year end.
The Iran deal certainly won't help things & we are currently at a time of seasonal peak demand so things in regards poo could get nasty from Sep onwards. From that free cash they need to pay corporate overheads and debt costs, so it leaves them fairly skinny.
Obviously GLNG comes on stream, however with the massive capex reduction any upswing in production could over time be offset by declining exploration and development in new wells.

What's other's thoughts?

[PSE]

Back to square one for me, I think the short term price of oil is unpredictable but am quite happy to wait it through. I think your free cashflow of $600m is a dramatic underestimate as the company cuts back on exploration, which it can't do for too long.
Yeah there is room to reduce the gearing and increase the dividend over the next three years. Just boring old buy and hold.

[Daytr]

Well I see them making around A$10/obe after production costs, depreciation etc and capex.
So with around 57-59M bbls of equivalent production that's around A$580M.
I admit its rough and dirty, but I don't think its too far away, when looking at their numbers for the first two quarters & that includes the reduction in capex. and exploration.
After that interest costs & head office costs need to be deducted, so you are probably looking at a figure of around A$400Mish.
And I think I'm being generous as I have discounted any figures as I normally would in an estimate.

[PSE]

Sorry yeah that's about right for 2015 even 400m of free cashflow is not too shabby though.
2015 is something of a worst case scenario, no point valuing a cyclical company on it's worst year.
Free cashflow will increase in coming years with GLNG and oil price recovery.
Very happy to hold, if I had spare cash I would be topping up at the quite nice price of $7 per share.

[Daytr]

On a A$7Bln valuation with A$8Bln of debt or more I would say its a very poor return.
Over time yes you maybe right with GLNG, however I still hold that oil can go much lower yet and this could impact their earnings substantially.

[PSE]

On a A$7Bln valuation with A$8Bln of debt or more I would say its a very poor return.
Over time yes you maybe right with GLNG, however I still hold that oil can go much lower yet and this could impact their earnings substantially.
The 7 bln market cap doesn't represent the value of the companies assets, we have talked about the debt the company will be in a position to reduce this. Sure oil could go lower or higher in the short term but in the long term I think my story for Santos is still in place, delayed somewhat by the additional tight oil and Iran.
It's not realistic though to think that oil will stay low long enough for STO to require a capital raising, but sure anything is possible.

[Daytr]

I disagree, oil can stay low for a very long time & perhaps lower than it is now.
But lets agree to disagree on that one.

[Daytr]

The market consensus I would suggest, outside the actual oil market, is that oil will recover.
I see article after article suggesting higher, not lower oil.
I have held my view for around 18 months & it certainly wasn't market consensus then.
See the oil rig count in the US actually increased (!) in the last survey.
Long term I can see STO doing very well as long as in the short term it can pay its debts & I don't think it can keep paying dividends & pay down debt at the level required as at some point they are also going to have to increase exploration/capex expenditure to maintain production.

I see the SP again bounced off $6.92, I think that is now the 3rd time it has done that.

[Daytr]

Huge drop in the oil price overnight! And this is happening in the peak demand season in the US, although it really only has a month to run. I was picking the strength we had seen would collapse in September, but its already been smashed. The Iran deal was probably the swing factor.
Obama announcing aggressive emission reduction of power generators will target coal, but also oil/diesel powered generation.
STO in the long term could actually benefit as its primarily a gas producer and the emissions are around half that of coal.
However they need to be able to get through this medium term period where a significant portion of their revenue is linked to oil.
I would suggest we will now see a serious test of the $6.92 key support in the STO SP.

[Daytr]

Well here we are $6.92 support yet again.
Does it hold? Big talk of a large CR on its way.
Oil almost back to its lows and we are in peak demand season.
Ain't looking good.
Very tempted to short, but should have done so a lot earlier so might wait to see if we see a bounce.

[neyney2010]

now we're really fuked

[Daytr]

Wow! huge move. I have been calling for it for some time, but I didn't expect it all in one day.
Rumours of a big CR at $5.80, at this rate they may struggle ton get that level.

[PSE]

On the way to $4 Daytr? Bargain, I still think the short term price of oil is unknowable and a capital raising unlikely.
Mr Market loves to speculate though and gets pretty emotional at times like these LOL.
Nothing has changed except foolish people selling their shares in a good company even cheaper, it's like robbing a bank but totally legal and ethical to buy from them.

[Daytr]

Perhaps the only people who have robbed a bank is Santos? i.e. they have borrowed over A$8Bln and may not pay it back! ;-)
Seriously though, yep long term you might be right but there are some very real risks around that debt and ability to service.
They should have done a CR 3-4 months ago & then the risk would have been alleviated.
The SP is obviously getting pretty close to where I predicted, especially when the SP was around $9 when I made it.
I think $4-5 is pretty likely. Oil particularly WTI you would think is getting pretty much toward its lows, although demand should ease off in a few weeks so that isn't going to help. Iran has been the latest swing factor.
Medium to long term I think oil will settle in a $40-60 range, unless there is pretty reasonable supply disruption.
That takes the value of these sort of companies well down compared to previous expectations.

[ynot]

What do you guys think of oil overall. In particular the etf OOO. How low can oil go ?

[Daytr]

Not sure what you mean by ETF ooo ? WTI? Brent?
Both are at pretty key levels technically. I made a call some time back that WTI might hit the low $30s & I think that's possible but not sustainable.
Brent perhaps $40. I think at some stage WTI will out perform Brent once US production cuts start kicking in.

[ynot]

Sorry I was refering to ASX listing OOO.

[noodles]

No it was $7 when you made that prediction, I still think the short term shareprice fluctuations are unknowable and meaningless.
Ynot gamble at the racecourse rather than on the price of oil, at least you may have some fun losing money.
KW, there is a lot of noise on the internet basically your article just reflects the fear of Mr Market and doesn't mean anything either.
The guy who wrote it is clearly a moron 'I have been writing for years that peak oil is nonsense' - I couldn't read any further as I don't want to be infected with his brain disease.
Peak oil is absolutely correct and tracks the decline of conventional oil production in the US perfectly - it didn't say anything about unconventional oil because it was written before the shale oil phenomenon.
The cure for low oil prices is low oil prices, the demand for oil remains huge and renewable energy sources remain marginal (much as I would like this to change it shows no signs of happening).
You are still driving an oil powered car.
At $65 US shale is losing money and running down rather than continuing, this is where I see oil recovering to in the medium term and at this price STO is good value. Even at $40 it can pay off it's debts just very slowly. Yes it is getting cheaper to drill but mainly because they are focusing on the best resources and contractors are hungry for work, these conditions won't last - oil is not on a downward spiral forever. The longer investment is curtailed the more the supply shortage when prices recover.
The main risk at the moment is GLNG getting completed on time, not Iran or Syria or China or whatever else Mr Market is getting emotional about.
John Mauldin was called a moron when he predicted the GFC as well.

[noodles]

What has that got to do with the price of fish. If he did he was right well done and what's your point?
He associates with the smartest minds in the finance world and as such his track record of getting macro issues right is fantastic. Maybe read the full article and reflect on your position.

EDIT: I would add that I have no long or short interest in STO. My main interest was defending John Mauldin.

[Daytr]

No PSE I think you will find it was around $9.30, as that's where I originally shorted from.
However I probably re-iterated it on here when it was approaching $6.92 support the last two times.
This is not the only forum I post on in regards STO.

Anyway yes cars run on oil, well for now. Demand is an interesting equation as you have the likes of India & China etc looking to consume more and then you have the conversion to electric & I think hydrogen fuel cell will also be a big player in the future.
Industrial consumption is likely to change as well with more switching to gas (could be a positive for STO) and also electricity generation and less of that will be oil or coal based over time.
USD65 is what I would say is optimistic and the upper end of the new range for oil prices.

Anyway its the short to medium term that is the concern as STO has debt now & poo is under severe pressure from over supply.
If Goldmansachs are right & over production is running at 2M bbls a day, how big must stocks be?
Closing in on a billion bbls? Well at least several hundred million bbls of crude in storage I would suggest.

[macduffy]

Company responds to market speculation about its capital needs.

http://www.asx.com.au/asxpdf/20150817/pdf/430k0zyx3357z1.pdf

[macduffy]

Duplicate post

[Daytr]

Yep short term positive, but potentially a long term negative not raising capital, depending on what poo does of course.
They could have raised capital at $8 SP not that long ago & if they had where do you think the SP might be? I would suggest at least a dollar or two higher than where it is now. Mugs.
PSE you are right $40 oil is probably not sustainable, but could be around for a wee while, perhaps 12-8 months.
I'm not as confident as you are about STO making money at that level of poo in fact I would say they would be cashflow negative.
In saying that Brent is trading some 20% higher than that level at the moment so that's what counts right now.

[Daytr]

Wow when I said short term positive, I didn't think STO would give all the gains back in less than 2 hours!
Not a great sign.
If they have to raise capital at $4-5 the board should be shot!

[Aaron]

Yes, it confirmed my view reading his article. More noise from the smartest people in finance.
It is unfortunate debt and finance people play such a big role in todays society as I think they add very little to real tangible growth/improvement but there could be long term changes underway regarding fossil fuels. I suspect not but I would be more pessimistic re the price of coal than oil in light of NZs coal fired power station closing.

http://www.marketwatch.com/story/why-40-oil-is-here-to-stay-2015-08-14

[Beagle]

Technically this stock looks absolutely rooted. With all their debt you'd be a brave man to invest at this point. My 2 cents.

[Daytr]

That's all well & good PSE, if the fundamentals haven't changed. The fundamentals have changed considerably for STO due to an energy glut.
In saying that at some point STO will represent good value, but I don't think we are there yet.

[Daytr]

So you are saying that STO can produce a profit of at least A$1.2Bln after paying down some debt at a $65 oil price? If the valuation is in the middle say $9 that means they would have to produce a profit nearer $A1.5Bln. I think that is very optimistic and so is your price of oil. I can only value it off the current poo & that means a PE well in the 20s imo. Lower oil lower valuation.
So off the current poo $4-5 is my value target

[Daytr]

If you don't think supply is a pretty key fundamental then I think you need to re-check your logic.
I don't buy a stock based on what I think the oil price might be in two years time either as that's pie in the sky stuff.
But overall $6 in a few years time might prove to be cheap, but I think it will get cheaper yet.
Something you scoffed at not so long ago.
The key price levels in oil are holding for now, and its important they do in regards valuations on stocks like STO.
There will be debt covenants to think about if the SP or earnings get too low.


No the fundamentals haven't changed, what happened was a future scenario that analysts weren't predicting played out. Oil price slump, oil price boom - normal business cycles.
STO was unlucky with GLNG capex bad timing and has been oversold to silly levels in response.

[noodles]

Macquarie says it is worth $9
http://www.businessspectator.com.au/article/2015/8/17/resources-and-energy/santos-puts-its-best-capital-raising-poker-face?utm_content=SocialFlow&utm_campaign=EditorialSF&utm_source=BusinessSpectator&utm_medium=Twitter

[Daytr]

I used to work for Macquarie. A very smart bunch, but aren't afraid to talk up a stock. Over time they could be right.
Half year report due out in 3 days so that should offer more clarity on how they are travelling.
In the last period they got a substantial boost from domestic gas prices so it will be interesting if that has been the same for the last 6 months.

[Daytr]

KW, what's A$9Bln between friends! LOL

[Daytr]

Yeah fair enough PSE, saying you scoffed was incorrect, apologies.
Always happy to learn & I have never said in the long run that your investment is a bad one.
As I have been saying all along, you will just get chances to pick it up cheaper & that's been quite correct and quite a lot cheaper.
There will be a point where I will probably go long as well, so hopefully will join you in celebrating a rise to a double digit share price.
Actually its a great idea to value a company off current earnings, especially when there is a massive amount of debt involved.
Otherwise I could have bought at $7, $8 or even $9, instead I shorted which has worked out very nicely.
A lot of people that were buying at those levels were valuing STO off a much higher poo than the price was at the time, let alone that its now lower than even then. Most using around $80 from memory which was a poor assumption.
We may see a bounce in a few days if the half year report is a positive, obviously the opposite is also true.
The market has shorted around 6% of issued stock which is a reasonable amount, but not excessive.
However there is possibly room for a short covering rally.

[macduffy]

That seems to cover most bases, Daytr.

;)

[Daytr]

haha indeed.

Just a note I put on HC regards Northern Hemisphere crude refining which could impact the SP

We are about to go into turn arounds in the Northern Hemisphere for refineries where they switch product from petroleum for the driving season to heating fuel for winter. I expect to see reasonable drawdowns in gasoline, but crude supplies should again swell considerably.
Interesting times!

[Daytr]

Pinched this from a post on HC its an extract from an AFR article.

"Santos is expected to see its first-half profit hit harder than its larger rival, with Macquarie estimating an 84 per cent slump to just $41 million on an underlying basis. Citi's estimate is $44 million, while UBS has $70 million.
But overshadowing the weak numbers will be the issue of whether chief executive David Knox will have to cave in on an equity raising, despite his adamance until now that Santos's balance sheet can see it through the downturn.
UBS analyst Nik Burns said that with an estimated $8.2 billion of net debt and no control over the oil price, Santos would have been better off raising equity earlier in the year even if it felt it could "scrape through".
"Because of the reduction they have made in capex and operating costs it looks like they have done enough on our numbers to avoid doing a dilutive equity raise but then it does raise questions around growth in the medium to long term," Mr Burns said."

If STO's profit for the half year is only around A$40-50M then watch out below! That's a lot lower than I would have dared estimate.
I had a ballpark figure of between A$200-300M.
Even if its double that and you double again for GLNG you are still only talking of around $320M for a full year.
And that's not paying down debt or paying a dividend.
That gives STO at that sort of lofty cashflow compared to the banks a PE of around 18-20.
If they are on the money and then you only double it once for GLNG then you are talking $160M pa then the PE is obviously double that at around 36!
The scary thing is, that oil hasn't averaged its current price, but around 20-25% higher than it already is.
For what its worth, I think the banks might be underestimating the result, but I don't have the data to hand or modeling prowess that they have either.
That report will be interesting that's for sure.

[Wolf]

Daytr, who do you use as a broker?

[Daytr]

I trade CFDs through CMC markets, but they don't offer NZX stocks FYI

[Daytr]

Interesting night for oil with WTI up 2% at one stage to close up well over 1% whilst Brent closed marginally down.
This could be the start of what I have been alluding to of WTI to start out performing Brent.
If it is, its a bit earlier than I anticipated.

[mayday]

What a ride on sp so far today, -7% to +4%, looks strong buying support causes massive short recovery

[Daytr]

Yeah volatile as hell. Almost getting to $5, $5.18 looked like the low.
Analysts were pretty much spot on with their estimates with A$39M profit an that was with a oil price averaging $60 I think, its obviously a lot lower now.
CEO stepping down, could open the door for that CR the market has been banging on about.
At the current poo I would suggest they are losing money, so that wont help the bankers sleep at night.'
Brent now sub $45 & WTI sub $40 and we are coming into the weaker demand season which I assume the market is already factoring in.
Dividend of 15c I think is foolish, but they are probably trying to deliver some good news to share holders.
I suppose the big question is. Will oil turn around? It will at some point but there still could be more pain yet as each rally has been sold aggressively.
Overall I suspect it will be WTI that performs better but there needs to be production cuts from US & Canada first.
My most aggressive call was for the SP to hit $3.50 which can't be ruled out, but my favoured prediction was the SP $4-5.
Obviously we are getting pretty close to that territory now.

[Daytr]

Well perhaps PSE if you hadn't ignored what was said you could have bought cheaper. ;-)
Good luck mate, I hope it works out for you.

[Joshuatree]

Craigs have research note out after FH15 and have a buy ,t/p $10.10 (12month) with npat increasing from $533m in FY14 to $ FY15 $160m to FY 16 $688 mill to FY17$1,169 mill

[PSE]

Craigs have research note out after FH15 and have a buy ,t/p $10.10 (12month) with npat increasing from $533m in FY14 to $ FY15 $160m to FY 16 $688 mill to FY17$1,169 mill
They also noticed that STO is free cashflow postive with brent crude above US $45 a barrel, once GLNG is operating. It's gone below that now, just.
The breakeven for cashflow was $60 earlier in the year, STO has cheaper assets than the US shale which has flooded the market.

[mayday]

Oil Price Pressure More Financial Than Physical: Morgan Stanley (http://www.wsj.com/articles/oil-prices-tank-brent-drops-below-45-barrel-1440381814)

[macduffy]

They also noticed that STO is free cashflow postive with brent crude above US $45 a barrel, once GLNG is operating. It's gone below that now, just.
The breakeven for cashflow was $60 earlier in the year, STO has cheaper assets than the US shale which has flooded the market.

Cheaper is good. But I wonder how their production costs compare? Drilling and production costs of USA shale gas/oil is said to have been and is currently falling quickly.

[JBmurc]

Cheaper is good. But I wonder how their production costs compare? Drilling and production costs of USA shale gas/oil is said to have been and is currently falling quickly.

I can't see how shale could be a cheaper way to produce Oil .. thats going from what I've read on the amount of trucks used to frac and the short lifespan of the discoveries

[PSE]

Cheaper is good. But I wonder how their production costs compare? Drilling and production costs of USA shale gas/oil is said to have been and is currently falling quickly.
This is the critical question isn't it and while the cost of production has been falling it is a big leap from there to say it is and will continue to fall.
Some of the cost reductions are due to better technology, some to focussing on the best resources and some due to contractors hungry for work. Of these factors only the technology will continue to improve, the best resources will deplete and the contractors will find work as the industry recovers.

http://www.naturalgasintel.com/articles/102988-most-significant-onshore-drilling-efficiency-gains-behind-us-says-bernstein