Despite Santos Ltd (ASX: STO), Oil Search Limited (ASX: OSH) and Woodside Petroleum Limited (ASX: WPL) falling 48%, 26% and 15%, respectively, over the past six months, the worst could be yet to come.
Credit Suisse analysts, quoted by The Australian Financial Review (AFR) today, say all three stocks are worth significantly less than their share prices would imply; assuming oil prices and the Australian dollar stay where they are, and a slope of 8.5 times for east coast gas prices.
According to the AFR, Credit Suisse energy analyst Mark Samter told clients under those assumptions Santos's net present value (NPV) is negative 13 cents per share, whilst Woodside and Oil Search had NPV's of $18.74 and $3.70, respectively.
"On his calculations, assuming current exchange rates, Woodside's share price assumes an oil price of about $US81 per barrel, Oil Search about $US70, and Santos about $US83," the AFR wrote.
Currently Brent crude is trading at $US51 per barrel whilst West Texas Intermediate is $US48 per barrel.
Obviously the market must believe the oil price is set to rebound.
Santos, the worst affected by the oil price crash, could continue to be sold off if current weakness in commodity prices persists. Especially if its credit rating is downgraded yet again in coming months.
Foolish Takeaway
Successful sharemarket investing is about preserving capital, then growing it. And chance and safety are inversely related.
As such it would be easy for speculators to argue that buying into Santos today, with the assumption oil prices will return, is a good idea. However, it's impossible to know if Santos is at its nadir.
Indeed commodity cycles don't usually pass as quickly as many investors would like, and given the overwhelming commentary suggesting lower oil prices will be with us for at least a little while longer, it probably won't hurt to wait on the sidelines and see how the Santos story plays out over the next six months.
As the father of investing, Benjamin Graham, wrote in his 1934 classic, Security Analysis, "The analyst must take possible future changes in account, but his primary aim is not so much to profit from them as to guard against them."
