The wild ride for shareholders in besieged oil and gas major Santos Ltd (ASX: STO) continued on Tuesday with the stock down around 6% in late afternoon trade. The recent falls come after a rapid rally in the share price in October which has sent the shares nearly 40% higher despite today's drop.
Media reports this week that Santos will cut a further 200 jobs once again highlight the headwinds not just facing the company, but also the sector and the wider economy.
The 200 lay-offs come on top of a 565 headcount reduction already announced back in August and will be a major blow to the state of South Australia where the company is headquartered and where the brunt of the latest retrenchments are expected to occur.
In fact, the unemployment rate in SA has now hit a 15-year high at over 8% with a raft of other redundancies announced across the state including around 380 job losses at BHP Billiton Limited's (ASX: BHP) Olympic Dam mine site and around 600 jobs at Arrium Ltd's (ASX: ARI) iron ore operations.
The job cuts come as Santos quickly tries to reposition its businesses to survive and prosper in a low oil price environment. Like Origin Energy Ltd (ASX: ORG) and Oil Search Limited (ASX: OSH), Santos has also been caught off-guard with its major LNG project entering production in a period of significantly lower oil prices than the company had envisaged.
Lowering the company's cost base – which unfortunately includes via staffing levels – is a necessary adjustment for the firm to go through to lower its average cost per barrel of oil.
With Santos looking to slash literally hundreds of millions of dollars from its expense line, the biggest cloud hanging over the outlook for the group is arguably whether a discounted capital raising will be required to support the balance sheet.
With a significant amount of bad news now baked into Santos' share price, the potential for the group to surprise on the upside given the low expectations the market seems to have factored in suggests to me that the risk-reward proposition is beginning to look more appealing.