Santos shares 'worthless' at current oil prices
A leading investment bank says Santos shares are worthless if current oil prices and exchange rates continue indefinitely.
Undertaking a hypothetical analysis at oil prices of $US55.20 a barrel and an exchange rate at 80.6 US cents, the Credit Suisse analysts found that Santos has a negative net present value of -13 cents.
Credit Suisse director and energy analyst Mark Samter told the ABC that he does not expect oil prices to remain at current lows over the long term, but his research predicts that Santos and Origin are likely to be under significant financial pressure even if low oil prices persist in the short to medium term.
The report finds that two or three years of oil around these levels would leave Santos below investment grade by 2016 as far as debt ratings agencies are concerned.
Origin would also be left with a dangerously high debt-to-income ratio if oil prices remained around current levels.
Both firms have spent billions of dollars to build large LNG export facilities on Curtis Island off Gladstone in Queensland.
Oil prices have fallen several dollars more from levels earlier this week when the research was written, with West Texas crude now at $US47.93 a barrel, but even at the higher price it used Credit Suisse found all the major Australian energy companies are still overvalued.
At $US55.20 a barrel, Origin should be worth around $7.60, Woodside between $18.74 and $22.54 (depending if currently unsanctioned projects go ahead) and Oil Search between $3.70 and $5.66.
At 1:00pm (AEDT) Origin was worth $11.10, Woodside $35.93, Oil Search $7.13 and Santos $7.43.
On Monday, Credit Suisse estimated that, at the currency exchange rate, it would take oil prices of $US70 a barrel for Oil Search to be worth its present market value, $US81 for Woodside, $US83 for Santos and $US84 for Origin.
However, all companies have seen their share prices slide further since the research was written, following further steep drops in oil.
If the Australian dollar was to fall further against the greenback, that would relieve some of the financial pressure on the firms by increasing their earnings in local currency.
Credit Suisse recommends that investors remain wary of the oil and gas sector, even after recent price falls.
"The high quality names are not oversold enough to make them screamingly cheap, whilst the lower quality stocks have large balance sheet concerns that could see materially further downside," the report warned.
"With perhaps the greater risk that oil prices don't bounce as quickly as we and consensus forecast, risks remain to the downside for the sector."
Credit Suisse added that Oil Search remained its "clear top pick" amongst the group of Australian energy firms.
