Should you sell your Santos Ltd shares?

Will Santos Ltd (ASX:STO) turn around its share price decline?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Santos Ltd (ASX: STO) has fallen by 24% in the last year. This is a worse performance than energy peer Woodside Petroleum Limited (ASX: WPL), but is ahead of Origin Energy Ltd (ASX: ORG). Woodside has fallen by 8% while Origin has declined by 30% in the same time period.

A rising oil price in 2016 and renewed confidence in the future price of the black gold could cause investors to consider the purchase of Santos. It may have recovery potential, but remains high risk in my view.

Oil price

This week has seen investor optimism in the oil price increase. That's because of comments made by Venezuela regarding the potential for a deal to freeze supply among major oil producing nations. The agreement could be signed by the end of the month and may have a positive impact on the oil price if it goes ahead.

However, even a freeze in supply would not rebalance the difference between supply and demand in oil over the short to medium term. In my view, it will take a number of years before demand catches up with supply. The increased prevalence of renewables in the energy mix will also cause the supply/demand relationship to remain more imbalanced for longer in my view. Therefore, consensus forecasts of US$39.40 per barrel of oil in 2020 may prove accurate.

Finances

Despite Santos' $2.5 billion rights issue in 2015, its balance sheet remains highly geared in my opinion. For example, as at 30 June 2016 it had net debt of US$4.5 billion. Although this is a reduction of 33% on its figure from a year earlier, Santos has a net debt to equity ratio of 68%. In the first half of the year its operating profit was unable to cover the US$137 million in finance charges.

Further, Santos has onerous LNG capital expenditure commitments. They will cause its balance sheet gearing to increase. Its new CFO may be unable to make debt servicing costs more affordable over the medium term. In its most recent half year results, Santos' free cash flow was negative. In the long run this situation is unsustainable and increases the company's risk profile.

Future Potential

Santos has a strong asset base which I believe offers the prospect of improved financial performance in the long run. Although demand for oil may stall, gas has been the fastest growing primary energy segment globally after coal in recent years. Santos enjoys a commanding position within the LNG industry due to its 1.4 billion barrels of oil equivalent in proven and probable reserves. Its production is forecast to increase by 22% over the next decade to 70 million barrels of oil equivalent.

However, Santos is a price taker due to its high degree of dependence on the price of oil. This makes it high risk. Its financial standing adds to its risk profile and could worsen in the medium term. Therefore, I believe that investors are better off investing elsewhere, starting with these three blue-chips.

Motley Fool contributor Robert Stephens has no position in any stocks mentioned. 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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »