Is it time to buy Santos Ltd at this share price?

Santos Ltd (ASX: STO) has seen its share price gain 5% in early trading today after oil prices surged once again overnight.

Brent crude oil gained 4% overnight to US$45.80 a barrel, after a sharp and unexpected drop in US distillate stockpiles according to the Wall Street Journal (WSJ). US crude oil prices rose 3.8% to US$42.63 a barrel. US government data also showed that domestic production had dropped for the sixth straight week, and US crude stockpiles rose by less than expected.

There’s a sense of confidence that oil has established a new trading range,” Giles Fitzpatrick, partner at London’s Hannam & Partners has told the WSJ. However, Venezuela’s oil minister Eulogio Del Pino has warned that oil prices may collapse in coming weeks if output freeze talks don’t resume.

The International Energy Agency (IEA) recently came out and said that there were signs that oil prices may have bottomed out.

There’s more good news for Santos as well. Woodside Petroleum Limited (ASX: WPL) recently reported that LNG prices had only dropped 10% compared to a 20% fall in the oil benchmark, pointing to prices higher than many investors had feared. Santos has a share in 3 Australian LNG projects, including Darwin, Gladstone LNG and the PNG LNG project.

The biggest issue for Santos is that it still labouring under a mountain of debt – $7.4 billion of it at the end of December 2015 against $1.2 billion in cash. That is further compounded by the company’s November 2015 statement that it would be cash flow positive in 2017 with oil prices at US$50 a barrel and the Australian dollar at 70 US cents. Both those factors are negative for Santos at the moment, with oil prices below that and the Australian dollar surging towards US 80 cents.

Foolish takeaway

At the current share price of around $4.45, Santos is trading on a trailing P/E ratio of ~150x after reporting an underlying profit of just $50 million in the 2015 financial year. But that either says underlying profit was much lower than the oil and gas producer is capable of (likely), or the current share price is hugely expensive.

Santos could also sell some assets to drastically reduce its debt if the company got desperate, but there’s far too much risk for my liking to take a punt.

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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

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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