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Santos Response To Coronavirus Outbreak And Weakening Oil Prices

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities 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$6.4 billion.

Update on Coronavirus

The coronavirus (COVID-19) was first reported from the Wuhan province in China on 31 December 2019. The World Health Organisation data shows a total of confirmed cases of 292,142 and 12,787 deaths globally. As of today (23 March 2020), there have been over 1000 confirmed cases and 7 have died of COVID-19 in Australia.

 

Why has the global oil price slumped?

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, with production significantly increasing while exceeding demand, global oil prices dropped significant to around US$20 per barrel from US$55 – US$60 per barrel. On the demand side, COVID-19 is causing a fall in global oil demand, putting further downward pressure on global oil prices.

 

What is the update on Santos share price?

In the last month, Santos share price has fallen by 62%. Santos is currently trading at around A$2.81. At these levels, the Santos share price is back around the 2016/2017 lows when Santos was heavily geared following major investments on LNG production facilities.

 

What is Santos response to the Coronavirus (COVID-19) and falling oil prices?

Santos management announced today (23 March 2020) financial measures to reduce costs in the calendar year. Santos management announced a A$550 million (38%) reduction in 2020 capital expenditure. A$50 million reduction in 2020 cash production costs and a target 2020 free cash flow breakeven oil price of A$25 per barrel.

An important point to note is that Santos has 6.2 million barrels of oil production hedged in 2020 at a floor price of US$54 per barrel. The reduction in capital expenditure is not expected to reduce produce guidance for FY20.

 

What is the outlook for oil prices?

The short-term outlook for global oil prices is negative. On the supply side, it is unclear whether Saudi Arabia and Russia can come to an agreement to cut production in order to increase the global price of oil. This is considering both countries have publicly announced that they have the capacity to last out this production war for several years. On the demand side, the continued spread of COVID-19 should 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. 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.

 


 

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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