As you may know by now, Santos Ltd (ASX: STO) is in the middle of a capital raising. It's aiming to get $540 million from institutional shareholders, and $500 million from ordinary shareholders. I think they're dreaming, myself – shareholders still remember being asked to tip in $2.5 billion last year.
Twelve months on, and Santos wants another $1 billion. Setting aside the ethics of asking shareholders – twice in 2 years – to bail out a heavily indebted corporation, is a freshly repainted Santos worthy of your investment dollars?
Soon to be $1 billion dollars richer, or at least $1 billion dollars less poor, Santos will be in a very different position to the one it was in in mid-2015. Management is focusing on its five core assets, and bundling the other assets together to run as one unit – possibly with the view to eventually spinning them off, just like Origin Energy Ltd (ASX: ORG) is doing.
As with Origin, and other oil and gas businesses, an investment in Santos requires taking a view on the oil price. OPEC has finally agreed to cut production, hooray. The Russians are in on it as well.
Yet there's plenty of idled capacity both here and in the rest of the world, waiting to get back in action if higher oil prices seem sustainable. The best guesses – which are a dime a dozen and usually aren't very accurate anyway – expect oil to be hovering around US$60 a barrel for the foreseeable future. A lower Australian dollar has some potential however (Santos sells oil in US$), with the Fed raising rates in the US overnight.
Santos has good core assets, but as we've seen over the past two years, the company also has a relatively high cost of production. Despite its best efforts, it hasn't been able to bring its sustaining cost of production (including exploration to find new reserves to replace drilled ones) down very far, even when slashing exploration expenditure to the bone.
Santos is only marginally profitable at around US$50/barrel, and while there is upside on the table if oil prices rise, there's not a lot here for you if they don't. I'd be inclined to leave Santos on the shelf for the time being.
