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Should you buy Santos Ltd at today’s share price?

Credit: commons.wikipedia.org

The Santos Ltd (ASX: STO) share price is down more than 4% in afternoon trading, currently at $4.14.

The oil & gas producer has seen its share price fall more than 64% in the past year, including 31% in the past three months. Santos’s share price had been under pressure for a number of reasons, but primarily because of the slump in oil prices.

Thanks to a massive global oversupply of oil, prices for the benchmark Brent crude oil have slumped to around US$44 per barrel, from above US$100 a barrel in late 2014. Oil prices had traded consistently above US$100 a barrel since 2011, prior to the recent fall.

Debt

Santos’ problem was compounded by the enormous amounts of debt the company had taken on for various projects, including its share of the PNG LNG project and the Gladstone LNG Project (GLNG). As at the end of June 2015, Santos had around $9 billion of debt on its books, and clearly its bankers weren’t happy. The oil producer was then forced to raise capital and sell some assets to try and reduce its debt pile – despite repeatedly ignoring calls from the market to raise capital since earlier this year – when shares were trading around $7.00.

Capital raising, asset sales

As a result, Santos announced a $2.5 billion capital raising priced at $3.85 per share two weeks ago – a substantial discount to the then closing price of $5.91. The company has also announced asset sales of around $1 billion, but whether that’s enough to keep the bankers at bay and put a base under the share price is anyone’s guess.

As I wrote at the time, there’s a question mark hanging over management and the board for not raising capital when the oil price began falling, or earlier this year when the writing was well and truly on the wall.

Where to from here for the share price?

Again, that’s anyone’s guess. Oil prices could keep falling further, and Santos may be forced into more dramatic action, such as selling some more valuable assets, such as its 13.5% share in the PNG LNG project. The Australian Financial Review has reported that Santos was considering selling 3.6% of its stake in a deal that could be worth as much as $2 billion. The good news is that the company has recently shipped its first cargo of LNG from its GLNG project, which should start bringing in some much-needed cash flow.

Foolish takeaway

With so much uncertainty surrounding Santos, Foolish investors might want to give the company a wide berth for now.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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