Crude oil prices made it three straight sessions of gains overnight. According to Bloomberg, West Texas Intermediate crude oil settled 0.5% higher at US$53.30 a barrel and Brent crude closed 0.8% higher at US$55.35 a barrel.
This is great news for Woodside Petroleum Limited (ASX: WPL), Beach Energy Ltd (ASX: BPT), and of course Santos Ltd (ASX: STO). But is the latter of the three a buy at the current price?
Although I am bearish on oil, I'll be the first to admit that if prices remain at this level or go higher then Santos is an attractive investment. Especially with its focus on building a sustainable business in a low oil price environment.
The oil and gas producer recently took advantage of higher oil prices to strengthen its balance sheet with a $1.5 billion institutional placement and share purchase plan.
According to the release, Santos will have a gearing ratio of approximately 32% following the institutional placement. This is then expected to drop below 30% following the share purchase plan. A huge improvement to the current gearing ratio of 39%.
This was a smart and opportunistic move in my eyes, especially with opinion largely divided on where oil prices go next.
Whilst the agreement by OPEC and non-OPEC countries to reduce their output to tackle the current supply glut has the potential to drive prices higher, it is by no means a certainty.
There is a lot of doubt floating around the market about whether the oil cartel will stick to their agreed quotas. Failure to do so could undo recent gains.
Then of course there is the U.S. shale producers. As oil prices rise I feel quite sure that more producers will restart production. This could end up adding to the supply glut and causing oil prices to plunge.
If you're confident that oil prices will remain at these levels for the foreseeable future then I would suggest you look at an investment in Santos. If you're like me and see oil prices falling, I would recommend you focus on other areas of the market.