Could the Santos Ltd share price fall below $3?

Loss making oil and gas behemoth Santos Ltd (ASX: STO) has suffered a calamitous fall from grace, with the share price down over 70% since October 2014, when the Australian National University chose to divest its shares on ethical grounds.

While good fortune saw ANU dodge a bullet, the pain may not be over for long suffering Santos shareholders.

The company is currently conserving cash, recently raising $2.5 billion by issuing shares at $3.85 apiece.

At the time, much loved AFR journalist Tony Boyd remarked that, “New shareholders entering the Santos share register will probably do quite well.”

While this might be true in the long-term, it has not proved to be true in the short term, with shares currently trading at just under $3.30.

So could shares fall another 10%?

At present, debt rating agency Standard & Poor’s gives Santos a BBB rating. Were this rating to be downgraded, it is very likely indeed that the share price would tumble further.

The ability for Santos to service its debt is all important, because even after raising over $3 billion in cash through issuing shares and selling assets, the company still has billions of dollars of debt.

There are two main ways it could struggle to service its debt. First, the oil price could stay lower for longer than anyone predicts. Fairfax reported last month that “S&P is assuming prices for Brent crude of $US50 a barrel for the rest of 2015, recovering only modestly to $US55 [in 2016]”.

However, the current oil price is below $US35. If it stays at these levels, S&P may revisit its assessment of Santos!

So Santos Ltd shareholders will be praying the price of oil goes up…

The other major risk is that the company’s Gladstone LNG project disappoints in some unforeseen manner.

In my view that is quite possible, since large infrastructure projects are very complicated, and even events like wild weather can hurt. On top of that, there is significant community opposition to the coal seam gas projects that are supposed to supply the LNG project.

In my view it is very possible indeed that Santos shares will fall below $3, though in the long term, a rising oil price could see shareholders laughing. Overall, though, the risk-reward equation remains unattractive compared to other opportunities on the ASX.

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Motley Fool analyst Claude Walker has no position in any stocks mentioned.

You can follow him on Twitter here: @claudedwalker

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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