Shares in oil and gas producers have sustained some huge losses over the last year. It's been carnage, like watching the first round of the AFL.
But some of the world's best investors have made their names chasing bargains and looking for value, so how does Santos Ltd (ASX: STO) stack up?
What the company does
Santos is one of the largest ASX listed energy producers with a key stake in the giant GLNG joint venture as well as PNG LNG with partner Oil Search Limited (ASX: OSH).
The company's reserves are massively weighted towards natural gas (90%), much of which is destined for export as LNG.
Why is it cheap?
Santos was sold off more heavily than peer Woodside Petroleum Limited (ASX: WPL) because of its high exposure to oil linked pricing and because the company carries a huge chunk of debt on its balance sheet.
The debt became a threat as sales revenues fell, pushing Santos to raise billions of dollars in equity to boost its balance sheet. As of 31 December 2015 the company's long term debt sat at $7.2 billion which puts the company on a debt-to-equity ratio of 0.73. This level of gearing may be considered high compared to Woodside Petroleum on 0.31.
Is there value?
On an asset basis Santos certainly looks cheap. The company's price-to-book ratio currently sits at 0.69 which means the company sells for a discount to the value of its net assets.
One possible reason for this could be if investors expect further asset impairments going forward. In my view asset impairments in the year ahead will be more subdued given the huge mark-downs taken in 2015 and the current lift in oil price.
On a comparative basis however Santos looks more expensive than some of the smaller ASX-listed energy producers.
As I noted here, both Senex Energy Ltd (ASX: SXY) and Beach Energy Ltd (ASX: BPT) look to offer better value than Santos when comparing each company's Enterprise value (EV) divided by each company's 2P (proved plus probable) energy reserves (EV/2P ratio).
Should you buy?
Santos certainly looks cheap at its current price relative to its reported assets. However it doesn't look as attractive as some of the other ASX-listed energy producers and I feel the company's debt burden still prevents Santos from being a true bargain at today's price.
