Shares in oil and gas producer Santos Ltd (ASX: STO) are at their lowest price in 20 years, leaving investors dazed at the prospect of oil falling further.
To add insult to injury, investors who participated in the company's November 1-for-1.7 renounceable entitlement offer at $3.85 are now sitting on a 30% loss.
It may be a bitter pill to swallow, especially as Santos' board rejected an all cash takeover proposal of $6.88 per share in October last year. The company noted at the time that the offer was opportunistic and undervalued the company's underlying assets.
For investors trying to get a grasp on Santos's current position, here are 3 key things to know today:
1. The future of oil prices
Wouldn't that be great? Clearly, knowing the future of oil prices would be a huge advantage in making a buy/sell decision on energy producers like Santos and Woodside Petroleum Limited (ASX: WPL). So let's eliminate star-gazing and conspiracy theories and take a crack at a simple, rational outlook of where oil may go from here.
One good economic theory by economist Anatole Kaletsky suggests that as oil supply continues to exceed demand over the medium term, the new ceiling for oil prices could be the marginal cost of shale oil production.
This is because shale oil is expensive to produce by comparison to conventional oil. Above the conventional cost of oil production, low cost producers (countries like Saudi Arabia) will produce a profit. But if the price of oil rises above the comparably high cost of producing shale oil, shale producers would turn on production, flooding us with oil and driving prices down again.
Kaletsky suggests a likely range of oil prices going forward at between US$20-$50 per barrel.
2. Fourth quarter and full-year results
Santos will release its fourth quarter results for the 2015 financial year on Friday this week (22 January, 2015), followed by its full year result in February. One area of particular interest will be the company's dividend.
The company's investor calendar currently lists dates for paying full-year and interim dividends in 2016, but as the oil price continues to slide it may be prudent for directors to preserve cash and cut the pay out to investors.
3. All eyes on operating costs
Investors will also be anxious for an update on operating costs when the company reports.
Santos anticipates full year 2015 production costs will sit between $14.20 and $14.60 per barrel of oil equivalent (boe), but given the spot price of oil currently sits at US$29 (AU$42) any improvement will be well received.
In May last year Santos noted that: "GLNG provides positive free cash flow at US$40/bbl oil". Investors will be watching to see this number fall to give signs of hope that the US$18.5 billion project can one day provide a return on capital.
Foolish takeaway
The uncertainty around oil prices makes it difficult to know if Santos is a bargain today and whether to buy or sell. Company directors seem to think it's cheap based on the company's assets. However on an earnings basis, if the price of oil hovers between US$20-$50 for the foreseeable future, the pressure will remain on Santos to minimise costs to keep cash flowing in.
