Santos Ltd (ASX: STO) is an Australian petroleum company. The five main petroleum assets that Santos has an interest in are located the Copper Basin, Queensland, Papua New Guinea, Northern Australia and Western Australia. Santos has a market capitalisation of A$8.4 billion.

What has happened to the oil price?

The recent drop in oil prices is caused by supply and demand issues. On 5-6 March 2020, OPEC and non-OPEC oil producers met in Vienna to discuss oil production and prices in the wake of weakening global demand due to lower global economic activity in part due to the impact of the coronavirus (COVID-19). The meeting concluded with Saudi Arabia and Russia not agreeing to cut production to increase the price of oil. This has resulted in Saudi Arabia and Russia embarking on a production war to capture increased share of the global oil market regardless of the implications for the price of oil. This is the supply issue for the global oil market, and with production exceeding demand global oil prices dropped significantly. On the demand side, COVID-19 is causing a large fall in global oil demand, putting further downward pressure on global oil prices. Interestingly, even after the most recent agreement with OPEC and non-OPEC oil producing countries, this agreement did not help global oil prices as the WTI oil futures price hit US$0 (21 April 2020). For a moment, the oil price futures fell below US$0, which has never happened before in history, which means that oil companies must pay buyers of oil to buy oil. Today (23 April 2020), WTI crude is around US$14.

What are the key points of Santo’s quarterly report?

Santo’s total sales revenue was US$883 million, down 14% compared with the previous quarter. Total production was 17.9 mmboe, down 4% compared with the previous quarter. Regarding production per location, Western Australia production was down 16% compared with the previous quarter. Cooper Basin production was up 7% compared with the previous quarter. Queensland and NSW production were down 3% compared with the previous quarter. PNG production was in line with the previous quarter and Northern Australia and Timor-Leste production was up by 28% compared with the previous quarter.

While total production was only slightly down compared with the previous quarter, the main point of concern for Santos this quarter are commodity prices. Over the quarter, the average realised price of LNG, domestic gas, crude oil and condensate were all lower than the previous quarter.

Interesting, with the price of futures oil being significantly down, it is unclear how this will impact Santos in June quarter. A positive for Santos, is that the company has hedged 14.2 million barrels of oil for the remainder of 2020 at a weighted-average floor price of US$39 per barrel with an average ceiling price of US$49. This will shield Santos to some extent in the coming quarters if oil prices do not recover over the short-term.

What is the outlook for Santos?

Santos can expect to face some headwinds over the short-term. This assessment is mainly because the outlook for global oil prices is negative. On the supply side, there is an over supply of oil in the market, even to a point where countries are running out of places to store new production of oil. On the demand side, the continued spread of COVID-19 has lower the demand for oil, as cities are in lock down, major airlines around the world have cut international flights and global economic activity weakens. However, Santo’s may be able to mitigate some of these effects through there hedging activities. Looking beyond the short term, the outlook for the global oil price is more positive once the economic environment returns to more normal conditions and issues around COVID-19 fade.

What is the market reaction?

The market reaction to Santo’s accountment is positive. Santo’s share price is up around 7% and is currently trading at A$4.28.

 


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This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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April 23, 2020