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STO

Santos Ltd : US$700 – US$800 million non-cash impairment

Timothy Anderson

Timothy Anderson is a contributor with the Australian Stock Report and is currently in his final year of studying a Bachelor of Applied Economics and a Bachelor of International Relations and Politics at the University of Canberra. Tim has a genuine passion for economics, specifically in macroeconomic analysis including how certain macroeconomic policies and indicators affect financial markets and the economy, as well as how these factors affect personal investment strategies. Tim currently holds RG146 Tier 1 Generic Knowledge qualifications.

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$11.1 billion. 

 

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What has Santos announced today?

Santos announced today an expected non-cash impairment charge in the range of US$700 – US$800 million before tax (US$490 – US$560 million after tax) in the 2020 half-year results to be released on 20 August 2020. The impairment charge is due to revised oil price assumptions resulting from the effects of the COVID-19 pandemic on energy market demand fundamentals.

The fall in oil prices in March and April 2020 occurred following a meeting on the 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. The WTI crude oil price currently around US40 per barrel.

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 oversupply 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 to Santos announcement?

The market reaction to Santos announcement is neutral. Santos’s share price is up around 0.2% and is currently trading at A$5.17. The market reaction is negative as the Australian market is up around 0.8% today. Santos trades at a forward P/E ratio in mid-teens and has an annual dividend yield of 3%.


Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.

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