Is Santos Ltd a bargain or value trap?

Last week, Santos Ltd (ASX: STO) announced the retirement of Chief Financial Officer Mr Andrew Seaton, a member of the company’s management team for over 11 years, who helped steer the company through the impact of the dramatic fall in oil prices over the last three years.

Since Mr Kevin Gallagher was appointed Managing Director and Chief Executive Officer of Santos on 1 February 2016, there have been a number of senior management changes as well as the resignation of directors Ms Jane Hemstritch and Mr Ken Dean.

There’s no doubt about it, Santos has been in a world of pain for the last few years and in response it has been slashing its capital expenditure to try to improve its cash flow. To illustrate the dire financial circumstances the company has found itself in, shareholders experienced a dramatic plunge in profitability from a positive 84.8 cents in earnings per share in 2011 to a negative 234.2 cents per share in 2015.

In the last 12 months though, there has been a marked improvement in the world oil price, rising to north of US$60 before falling back more recently to around US$44.

The problem for Santos is its earnings are highly dependent on the world oil price and as reassuring as the recent rally in oil from below $US30 has been, there are no guarantees that the oil price will continue to rise, and hence help save Santos shareholders from the economic funk it’s currently in.

No doubt, the appointment of Mr Kevin Gallagher is a good move by the Board to ensure a fresh approach to Santos’ woes is undertaken, but thinking long term, I’m not sure if Santos is a company that is well suited for long-term portfolios.

Of course, anyone who has purchased shares of Santos in the last two years may be forced into a long-term position if they’re reluctant to realise a loss on their purchase, but such is the nature of investing in companies which have no control over the selling price of their key products.

Thinking 12 months out, there’s a possibility that oil prices will continue to fall with excess supply not expected to balance with demand until at least mid-2017 at the earliest.

Given this, I wouldn’t buy Santos today, and for similar reasons, I’d also avoid Woodside Petroleum Limited (ASX: WPL).

I far prefer to invest in companies that have a degree of pricing power, companies far removed from the oil and gas industries, which have created products that can demonstrate true pricing power. Such companies include Cochlear Limited (ASX: COH), Bellamy’s Australia Ltd (ASX: BAL) and REA Group Limited (ASX: REA). I’d recommend that anyone serious about growing their net worth over many years has these companies on their watch list.

Forget companies cutting dividends like BHP and Rio Tinto when you can get GROWING dividends.

This "dirt cheap" company. is growing like gangbusters, and trading on a fat dividend yield, FULLY FRANKED. With interest rates set to stay at these low levels for years to come, for income-hungry investors, including SMSFs, this ASX company could be the "Holy Grail" of dividend plays for 2016. Click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required.

Motley Fool contributor Edward Vesely owns shares of Bellamy's Australia. The Motley Fool Australia owns shares of Bellamy's Australia. 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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