The shares of Australia's leading oil producers Beach Energy Ltd (ASX: BPT), Origin Energy Ltd (ASX: ORG), Santos Ltd (ASX: STO) and Woodside Petroleum Limited (ASX: WPL) have all dropped lower at the market open today following a drop in oil prices at the end of last week.
Oil prices dropped on Friday over fears that OPEC won't be able to reach a supply agreement at its meeting in Algiers this week. According to Reuters major crude exporters Saudi Arabia and Iran have made little progress in achieving a preliminary agreement ahead of the talks which aim to freeze production to boost prices.
Oil prices have risen in recent weeks in anticipation of an agreement, but the majority of these gains have now been wiped out. Brent crude futures settled down 3.7% to US$45.89 a barrel and US West Texas Intermediate crude futures fell 3.97% to settle at US$44.48 a barrel.
Whilst an agreement cannot be ruled out, it does at this stage look to be unlikely. OPEC has a history of trying to agree on a production freeze, but has always fallen short. I don't see any reason to believe that this time it will be any different unfortunately.
This isn't what shareholders of Santos will want to hear, especially after watching its share price plummet by almost 25% in the last three months. As tempting as it may be to invest in Santos in the hope of a turnaround, I would personally recommend holding off an investment in the oil and gas giant.
Santos has a huge amount of debt on its balance sheet and I have concerns that a capital raising may be necessary again in the near future. As the linked article states, Macquarie Group Ltd (ASX: MQG) has tipped Santos to raise as much as US$3.5 billion in capital in order to protect its credit rating.
Its analysts have estimated that oil prices would need to average US$72 a barrel to meet Standard & Poor's credit targets. With oil prices highly unlikely to reach these levels for a long time, a capital raising may be its only option.
So for now I would personally stay clear of the oil industry and focus on other areas of the market such as the health care and information technology sectors.
