Oil prices continue to fall, with Brent crude oil falling again on Friday to US$33.55 a barrel – the lowest level since June 2004. And the trend appears unlikely to stop anytime soon, with Brent down again today.
The massive oversupply of oil globally has seen oil prices fall by more than 10% since the start of the year – and we're only 11 days in. Overproduction is the main culprit, but slowing demand, particularly from China is compounding the issue.
A host of investment banks are forecasting prices to fall below US$30 a barrel – and that doesn't appear far away. Goldman Sachs has even said that oil could US$20 a barrel, according to CNBC, and we wrote last year that prices were headed ever lower.
Sooner or later, higher cost producers are going to have to stop producing oil or go bankrupt, which should relieve the current oversupply situation and lead to oil prices recovering, but as the saying goes, markets can remain irrational for much longer than expected.
The world's largest oil producers show no sign of slowing down their production – in what looks like a case of chicken – first to fold is the loser.
Australia's main oil producers Woodside Petroleum Limited (ASX: WPL), Origin Energy Ltd (ASX: ORG), Santos Ltd (ASX: STO) and BHP Billiton Limited (ASX: BHP) will be struggling under the current price to turn a profit, but Santos' large debt balance make it possibly the most vulnerable to the sliding commodity price.
As oil prices fall, not only does Santos face lower revenues, but it also faces a downgrade of its debt (which will likely mean higher interest costs) and that could push the share price even lower than its current level of around $3.20.
Despite raising $3.5 billion from asset sales and a capital raising late last year, Santos could be forced to revisit the market and raise even more capital – it still has more than US$6.2 billion of net debt on its books.
The company said it expected to be cash flow positive from 2016 with oil prices at US$50 a barrel and the Australian dollar at 70 US cents. Well, oil has gone well below that, and the Australian dollar is only just below US 70 cents at 69.52 cents.
Foolish takeaway
We've seen a number of smaller iron ore producers go to the wall already as the commodity price crashed. Santos could be the biggest casualty unless the company shores up its balance sheet with more asset sales and maybe another capital raising.
Look out below.
