[VIDEO ANALYSIS] What are the long and short-term prospects of Santos (STO)?

William O’Loughlin:

Okay, next question. Ian from New South Wales asks, “Can you give your thoughts on Santos, STO, for both short and long-term? They appear to be on the way back, with stable credit rating, cash flow, and debt reduction, et cetera.”

 

Shannon Rivkin:

Thanks for the question, Ian. Look, undoubtedly, they have averted potential disaster by reducing debt, dramatically, which, given what the share price was doing at one stage, was very much on the cards. Certainly, of all the prices, it remained low. Interest in their assets remained at least low enough for them to not consider selling any. That was a potential outcome, so they have fixed that, but, undoubtedly, probably more than the others, they haven’t done the best job in doing that, I should say. I think they received much criticism.

 

 

For one, one of the recent announcements was that they would be selling off a certain amount of assets to cover desired debt reduction, and then they surprised the market with another entitlement offer, which is one among a few. Given the other announcement, I think they got quite a bit of criticism, and I think that’s the biggest problem with their company right now. Management in the board, I think, are very much out of flavour with the market, which is probably at least one positive.

 

 

I think this one really remains a strong takeover potential, because certainly, there are already companies on the register that have shown interest. It has received take over approach in the past, and certainly, if you took a more positive view of the oil price, this would be one that would stand out. Certainly, as far as a hostile offer, as well, I think shareholders would happily abandon the board for an exciting opportunity.

 

 

In the short term, look, I should say, undoubtedly, they’re going to be exposed to what the oil price does. Because they’ve reduced debt, I think the downside is not as high as what it once was, but, certainly, we’re seeing oil prices drop in the last couple of weeks. You’ve seen Santos fall back, as well, and I think that’s going to remain a theme, in the short term.

 

 

Our view is, over the long term, we’re going to see higher oil prices. Probably Santos is okay, long-term, but I think if you have a positive view on oil, I can’t say Santos, for me, is the most exciting one, with the exception of its takeover potential. I think Oil Search, Woodside, and even Origin, which was in the same mess, have handled things a lot better. Management is probably the most important thing you’d ever look at when considering an investment, and theirs just hasn’t really instilled loyal confidence.

 

 

If you’re an oil bull, I think, maybe look elsewhere. If you are punting on a takeover, Santos certainly is the most likely to be a good fall.

 

William O’Loughlin:

Yeah, the only note I’d make, probably, is that, although Santos has been reducing debt, they still do have a fair bit of debt left.

 

Shannon Rivkin:

Oh yeah. There’s no way they’re out of the woods, I agree with you. Yeah. Oil is back on the 50, and who knows where it could go?

 

William O’Loughlin:

Right.

 

Shannon Rivkin:

Even though, we think it’s going to go higher over the long-term.

 

William O’Loughlin:

Okay.