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Santos well placed to beat an extended period of low oil prices

It’s been a fantastic month for some of our Oil & Gas E&P (exploration and production) companies. At the same time, the energy sector has enjoyed a solid performance, up 14%. There are however, a handful of companies that have done particularly well. Here are five of the top performers:

Company 1 month performance ASX200
Out-Performance
Santos Ltd (ASX: STO) 26.5% 26.1%
Beach Energy Ltd (ASX: BPT) 25% 24.6%
Oil Search Limited (ASX: OSH) 23.8% 23.4%
Karoon Gas Australia Limited (ASX: KAR) 10.5% 10.1%
Woodside Petroleum Limited (ASX:WPL) 7.6% 7.2%

(Source:Commsec)

The clear winner over the past month was Santos. Its share price rose 26.5%, followed by Beach Energy up 25%. All five companies outperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO), but Santos crushed the ASX200 by 26%. Santos still believes it is best placed to weather the oil price rout after shedding a quarter of its workforce and taking a staggering $2.7 billion full year loss.

The loss was caused by $2.8 billion in previously flagged writedowns and cuts to its oil and gas reserves.

The company is reducing the value of its key Cooper Basin, Gladstone LNG and Gunnedah Basin assets, and joins a growing list of energy players hit by the slump in commodity prices.

Santos has slashed almost 1,000 jobs in the past 18 months as it reduces costs.

New chief executive Kevin Gallagher said he was not in a position to say exactly where and what cost cutting would be implemented in 2016, having only been in the top job for a few weeks.

“My focus in the short term is to scrutinise our operations and identify those levers,” Mr Gallagher told reporters.

Chief financial Officer Andrew Seaton said Santos was focused on living within its means.

“On a multitude of fronts, the Santos that you see in 12 months time will be quite different,” he said.

The current weakness in oil prices was part of a cycle, rather a structural shift in the industry, Mr Gallagher added.

“Following any period of high oil prices, we reach an oversupply situation and prices crash back to historically low levels and that’s what we’re seeing now,” he said.

Santos predicts oil prices will rise to $US40 a barrel in 2016, $US60 in 2017 and $US70 in 2018.

The company will not have to reduce debt in 2016 if the oil price stays above its break-even cost of $US32 a barrel.

Benchmark US crude oil currently trades at around $US34 a barrel.

Santos has net debt of $6.5 billion, and is focused on strengthening its balance sheet, slashing capital expenditure to $1.1 billion and improving its operating efficiency to withstand lower oil prices.

“Santos is well placed to withstand an extended period of low oil prices,” the company said.

With more than $4.8 billion in cash and committed undrawn debt facilities and no debt maturities until 2019, it does not foresee any issues with its debt covenants.

The company’s underlying profit in the year ended December 31 plunged 91% to $50 million, as sales revenue dropped 20%, even with higher production.

Santos plans to alter its dividend policy and expects its payout ratio to be a maximum of 40% of underlying net profit.

 

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Motley Fool contributor John Hopkins has no position in any stocks mentioned. 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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