Falling commodity prices have wreaked havoc on the S&P/ASX 200 (INDEXASX: XJO) over the last month, wiping away any gain etched out over the previous nine months. But the purge is also a great buying opportunity for out-of-favour blue-chips like Santos Ltd (ASX: STO).
A possible bargain
Down 10% in the last month alone, Santos looks as attractive as ever with the strong production from PNG LNG and the onset of GLNG in the next 12 months. It's a potential bargain I just can't keep away from.
In its 2013 Annual Report Chairman David Knox noted that at 2013 energy prices Santos was on track to double operating cash-flows by 2016, with distributions to shareholders rising along the way. Certainly an attractive proposition, but as the price of oil falls, can it hold up?
Increasing risk exposure
The only thing holding me back from buying Santos today is its increasing exposure to oil-linked pricing. Though crude oil only accounted for 20% of total production in 2013, Santos is increasing the proportion of revenue that is derived from oil-linked pricing which will jump from around 35% in 2012 to around 70% in 2015.
This contrasts with Woodside Petroleum Limited (ASX: WPL) which has been raising prices on its contracted Pluto LNG production.
Thus the falling price of oil will likely have a higher potential impact on revenues for Santos. The company has options to hedge the risk using oil price swap and option contracts, but had none in place at the time its annual report was published in April.
Is it still a bargain?
Despite this, current fears may be over-blown. A poll of 30 commodity analysts by Reuters suggests Brent crude oil will average U.S. $103.30 per barrel in 2015, an almost 14% increase on its current price and still at historically high averages.
For my part, I'll be keeping an eye on Santos and would find the company hard to resist at a share price under $13.
