The US dollar has slipped, but the international oil price has managed to stay mostly at or above $US28 a barrel over the past year.
Price movement
The US dollar has slipped, but the international oil price has managed to stay mostly at or above $US28 a barrel over the past year. Furthermore, the price almost passed a 24-year-high when it touched $US39.95 in February.
One would have expected the outlook for Santos's fortunes to change for the better. However, the price has dropped twice as much as the overall market over the last year. It has recently rallied 12 per cent after the announcement of an increase in its Legendre oil field, which raises the question: are its fortunes ready to turn?
Profile Santos is an oil and gas producer, principally for the domestic market, although it also exports its products internationally. The company has exploration and production interests in proven Australian provinces and in the United States and South-East Asia. Its major asset is its investment in the Cooper and Eromanga basins.
Santos is run along six business divisions representing its economic interests in Central Australia, Southern Australia, Northern Australia, Western Australia, the United States and South-East Asia.
The company's head office is in Adelaide, and the South Australian Government placed a maximum 15 per cent shareholding ownership on it in the late 1980s. The company has since made several attempts to lobby the Government into amending this, but it has declined.
This has removed the possibility of shareholder and/or corporate activity.
Current details
The full year to December 31 produced a $322 million net profit, down from $446 million in 2001. Expectations are for a slightly weaker, or flat at best, net profit this year (giving it a 12 times P/E). Unfortunately earnings are expected to decline further next year, with a net profit forecast in the region of $200 million. At this point net profit would almost equal its dividend payout, making it hard to finance growth without cutting dividends.
Recent market concern has focused on the mooted acquisition of Chevron's Papua New Guinea oil and gas assets. This is not necessarily seen as a plus, due to the fragile and fickle states of PNG's politics and economy.
Sector
Woodside Petroleum and BHP Billiton are Santos's major Australian competitors. Woodside has established some long-term liquid natural gas contracts with China, which will underwrite further gas contracts and maintain its growth. BHP Billiton's oil and gas division's earnings (five times larger than Santos's) are expected to taper over the next 18 months before increasing.
Presently the established Australian onshore oil fields are in decline, forcing the need for more expensive and risky offshore exploration.
Worth buying?
Management has made some progress in arresting the decline in reserves. However, new and large discoveries need to be made, but the time lag from such discoveries to production mean that the company cannot be rated as growth stock. The impression is of a blue chip stock in serial decline. Further weakness and downside risk exist. Sell.
Geoffrey Hill is presenter of ABC NewsRadio's daily afternoon finance report and is an independent private client adviser. Email gh@ghill.com.au
