With the oil price having plummeted over the past six months, few oil and gas stocks have been spared from the sell-off.
One stock which has been in the 'eye of the storm' has been Santos Ltd (ASX: STO). Its share price has sunk 37.6% in the last six months. While predicting what is in store for the oil price over the next few years is nigh on impossible – and it's even more complicated to determine what will happen over the next few months – arguably it could be possible to determine when the investment odds are in your favour for certain stocks.
Over sold?
Santos has now bounced 11% so far in April which suggests that at least some in the market believe the stock has been oversold and reached a point where the rewards outweigh the risks with the upside greater than the downside.
Let's consider the upside…
- Santos is one of the leading oil and gas producers in the Asia-Pacific region which includes one of the largest exploration and production acreages in Australia
- Thanks to long-term (20 year) offtake agreements with Asian buyers, Santos' portfolio of LNG assets, namely Darwin LNG, PNG LNG and GLNG are set to provide strong cash flow for decades to come.
- For the year ending December 2014 the group reported a solid increase in sales volumes, record sales revenue and production volumes at their highest level in five years.
- To combat the lower oil price, Santos has announced a 44% reduction in its capital expenditure program to $2 billion in 2015.
- Global population growth is forecast to add 1.1 billion people to the world in the next 15 years, thereby increasing the total population to 8.4 billion. Much of this population growth will be concentrated in Asia – a market Santos is well placed to serve as its demand for energy rises.
First quarter production figures
- Last week Santos announced its first quarter production figures which showed a 15% increase in production and a positive update on the progress of GLNG, with the project on budget and first production expected around the end of the third quarter.
- Santos also managed to reduce capital expenditure by 40% and made "solid inroads towards reducing production costs per barrel across the business".
Still risky?
While all of the points above are positive it still doesn't hide the fact that sales revenue for the first quarter was down a massive 40% on account of the lower oil price.
The 11% share price gain in April could signal a stabilisation in the stock but it could also represent a 'value trap' with further falls ahead. It's a similar concern for peers such as Woodside Petroleum Limited (ASX: WPL), Oil Search Limited (ASX: OSH) and Beach Energy Ltd (ASX: BPT).
