In the 5 days since the market opened on Tuesday of last week, the Santos Ltd (ASX: STO) share price has risen by 3.6%. This at a time when the oil and gas sectors are under siege due to persistent low oil prices driven by low demand, and a glut in supply. There are a few reasons for this movement in the Santos share price, some of which are due to the performance of the company, not only external factors.
What is supporting the Santos share price?
On 15 October, Santos CEO Kevin Gallagher confirmed that the cost of the Narrabri gas project would be much cheaper than the $3 billion-plus price tag being widely quoted. This had raised doubts over the economic feasibility of the project. Particularly amid low gas prices globally, as well as the proposed Port Kembla LNG import terminal. The latter is a project proposal by Andrew Forrest. Tattarang, Forrest’s private investment vehicle, will own 100% of the Port Kembla terminal and has plans to accelerate progress.
Nonetheless, Mr Gallagher told Citi’s Investment Conference that the $3 billion figure was out of date. Specifically, that cost reductions Santos has made in its drilling operations in Queensland would lower the estimate. Moreover, he promised to update the market on progress on reducing capex at an investor briefing on 1 December.
Moreover, drilling results have significantly exceeded expectations at the company’s fracking project at its Tanumbirini-1 well. This is located in the Northern Territory and played a part in the Territory’s recent election. In addition, it continues to rapidly progress for the 1.7 mtpa Moomba carbon capture and storage (CCS) project. Consequently, the project is on track to be ready for the final investment decision by year end.
Despite this good news, the Santos share price remains down by 35.5% in year to date trading.
There are some significant factors bringing good news to the sector. First, and unfortunately, weather forecasters are predicting a harsh winter for the Asia region. At present natural gas is selling for USD$2.96 per mmBtu, significantly higher than the price has been throughout the entire year. Although, still lower than the average USD$6 per mmBtu, at which LNG traded a year ago.
LNG demand normally improves during the winter in the northern hemisphere, but mild winters have been harsh to producers before. Nevertheless, Japanese forecasters believe the likelihood of a La Nina was 90 percent. The mild northern summer is part of why gas prices fell so hard, damaging the Santos share price in the process.
In a recent video conference organised by the Gas Exporting Countries Forum (GECF), representatives stated:
We expect LNG demand to increase by four billion cubic metres this winter and that’s led by growth in China, Japan and South Asia.
LNG supply is expected to grow by three billion cubic metres, led by the US. And when we put together demand and supply forecast, we expect the LNG market to be slightly tighter than last winter by one billion cubic meters.
The Santos share price edged up slightly today on the back of positive sentiment. However, there appears to be a culmination of good news for the company. In particular the reduced costs for its major expansion project, and the positive results for its NT fracking project. If this were to combine with a harsh northern winter, there may be pressure on the Santos share price.
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