Money
Issue No. 27 - February/March
[SA stocks ] – in review
by Mr Marcus Campbell
Santos – drilling for upside
With the outlook for the oil price remaining very strong as we enter 2006 I thought it would be timely to review the key drivers for South Australia’s major oil & gas company, Santos Limited (STO).
STO’s third quarter fiscal 2005 production result was ahead of our expectations, due in part to a better than expected production performance at Bayu/Undan, Mutineer and Cooper Oil and higher than expected sales revenue (see attached charts).
Production guidance provided by the company looks conservative and they have recently announced that production remains on track to meet guidance.
While at current levels Santos appears reasonably priced on near term price-to-earnings ratios, we believe a significant amount of value is already factored into the share price for the Jeruk discovery (which remains uncertain). The lack of material growth options available to replace the declining Cooper Basin asset remains a concern.
Accordingly, we believe the risk/reward balance does not favour buying the stock at current levels and we maintain our neutral Hold recommendation.
The key drivers for the stock in the short term are:
- The Oil Price
While there has been some concern that recent high oil prices are causing demand destruction, we believe the reduction in demand is more a function of lack of supply. We believe strong oil demand and limits on global oil production capacity will continue to support the oil price and leave the earnings risk for STO skewed to the upside.
- Jeruk
STO continues to appraise the Jeruk discovery and is yet to provide a reserve estimate. We believe our estimates around the likely outcome for the Jeruk field are conservative.
- The PNG Project – What role will Santos end up playing?
Through its 25% stake in the Hides gas field, STO could potentially secure an approximate 9...
