Despite a strong gain last week, the Santos Ltd (ASX: STO) share price has thoroughly underperformed the market and its industry peers in 2017.
Year-to-date the oil and gas giant's shares are down approximately 19%.
Are its shares a bargain buy?
I think Santos would be very attractive at its current share price if oil prices can recover to the high end of the US$50 to US$55 a barrel range.
But whether that ultimately is possible in the next 12 to 24 months is debatable. Especially after recent production data out of OPEC.
On Friday night Reuters reported that data from tanker-tracking firm PetroLogistics pointed to a 145,000 barrels per day lift in production by OPEC in July.
This would lift the oil cartel's production above 33 million barrels per day and over 500,000 barrels per day higher than its target output.
Unsurprisingly this led to West Texas Intermediate futures tumbling 2.5% to US$45.77 a barrel and Brent crude oil futures falling 2.6% to US$48.00 a barrel.
Just 18 months ago this latest drop in the oil price would have made things very difficult for the company. At the start of 2016 Santos had a free cash flow breakeven forecast of US$47 per barrel.
But management has worked hard to reduce costs since then and has reduced its free cash flow breakeven forecast to US$33 per barrel.
Should you invest?
I think that Santos shares are about fair value based on the current oil price. But if you feel confident that OPEC will get its act together and help lift oil prices, then it certainly could be a great option in the resources sector.
Based on its current share price and cash flow breakeven forecast, I would choose it ahead of oil and gas peers Oil Search Limited (ASX: OSH) and Woodside Petroleum Limited (ASX: WPL).
