In today’s daily we have covered stock research on Santos  (BUY).









 
The S&P 500 was down by 10.22points or 0.50% on Tuesday to 2017.26 points. U.S. stocks fell in afternoon trading on Tuesday, reversing earlier gains of more than 1 percent, led by a drop in materials and energy shares  as commodity prices fell further. The S&P 500 around midday broke below its 50-day moving average, triggering selling. Copper prices dropped further below $6,000 per tonne to their weakest level in more than five years, while oil prices extended losses in U.S. afternoon trading.

Shares of homebuilders also fell broadly after KB Home  forecast a drop in gross margins for the first quarter. Homebuilder stocks had been up earlier in the session, but KB Home was last down 13.7 percent, while a housing index was down 0.9 percent. Alcoa Inc  shares were down 2 percent, also having reversed earlier gains. The company late Monday reported a higher-than-expected quarterly profit due to automotive demand, higher aluminum prices and lower energy costs. 





Alcoa Daily Chart (Source – Thomson Reuters)
S&P ASX 200was down by 18.0 points or 0.33%on Tuesday and closed at 5404.7 points. Resources giant BHP Billiton dropped 1.9 per cent to $27.97, while rival Rio Tinto lost 1.8 per cent to $57.46. Fortescue Metals Group lost 5.2 per cent to $2.55. Mount Gibson Iron was the worst-performing stock in the ASX 200, dumping 11.3 per cent to 23.5¢. Woolworths dipped 0.6 per cent to $29.90, while Wesfarmers, owner of Coles, added 0.1 per cent to $42.49. Medibank Private dipped 0.8 per cent to $2.38.
Australia’s biggest gold producer, Newcrest Mining, added 3.8 per cent to $12.95. Junior goldminer Evolution Mining was the ASX 200’s best-performing stock, up 9 per cent to 91¢. SPI futures are down 40 points to 5313 at 6.19am AEDT. The Australian dollar is trading at US81.50¢ at 5.49am AEDT, compared with Tuesday’s local close of US81.56¢. Iron ore was down $US1.56 at $US68.74 a tonne

Newcrest Daily Chart  (Source – Thomson Reuters)
 
Top Performers on the ASX 200 were :-


 
 
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Stock of the Day - Santos (BUY)

Quite recently, Santos (STO) announced that it had secured an additional 3-year, $1 billion bilateral bank loan facility. This facility with ANZ Banking Group will help in augmenting the Company’s liquidity profile and financial flexibility at striking funding costs. As per the Company, the facility will make available a substantial buffer over and above STO’s funding needs during the existing uncertain oil price environment. The Company has performed well last year with sales totaling A$1.89 billion during the second quarter of 2014 indicating an increase of 25.0% from the A$1.51 billion in sales during the second quarter of 2013.


Global LNG Demand vs. US LNG Supply in 2025 (Source – Company Reports)

Under the joint venture operational updates, Cooper Energy reported that Jenners-1, the exploration well located in PEL 100, Cooper Basin under JV including 25.835% of STO, has been plugged and abandoned after reaching a total depth of 2,525 meters in Pre-Permian Basement. For South Australian Gas (STO 66.6% under JV with Beach and Origin), the infill drilling campaign targeting conversion of undeveloped reserves to developed reserves is expected to increase gas production from 2015. In December 2014, three wells were drilled in the Big Lake field. The SACB JV close space infill drilling campaign is also nearing completion. For Queensland oil, the Tennaperra-4 appraisal well (STO 70% under JV with Beach) was drilled to appraise the northern area of the field and intersected 5.4 meters of net play in the Birkhead formation and 3.2 meters in the Namur sandstone. The well was cased and suspended as a future oil producer. In PEL 513 under Drillsearch and STO’s JV (60% STO and operator), a second wet gas discovery was made in mid-December 2014. Third well in STO-operated drilling campaign, Aquamarine-1 was drilled in PEL 632 block.

Looking at the on-going negative market babble about STO, the Company aims to make an effort to fight back. With $3 billion in liquidity majorly entailing banks loans and credit lines, the Company stated that it possesses the “financial muscle” to make it through to the end of 2015 when its GLNG project in Gladstone is cash flow positive. STO further affirmed that that the Company does not need to defend its BBB credit rating with the issue of new equity regardless the turbulence in the oil price. The Company’s investment grade credit rating does not appear to be a prerequisite for existing facilities.


Roma Well Performance as at October 2014 (Source – Company Reports)

We do note that the weakness in the share price appear to be steered by the threat of a credit rating downgrade by ratings agency Standard & Poor’s. The Company thus raised a concern over the recent market commentary about its share valuation dealing with worthlessness of STO’s equity if $US50 a barrel oil remained in place “in perpetuity”. STO in its counterargument stated that the Company has made net profit of $355 million when the average oil price was $A51.88 in 2004, and currently, the oil price is $A60 a barrel. With the costs in certain areas of the business declining by about 10 to 30% is a good enough reflection of the Company’s response in a cyclical industry. Coupled with improved efficiencies, this may benefit the Company. STO stated that it has the capability to make the same amount of money in a $50 world as in a $100 world given other measures appropriately taken-up.

It is prudent to note that with developments such as well stimulation and testing program scheduled for 2015-16 for the McArthur Basin Tanumbirini-1, 2015 exploration schedule across super basins, appraisal drilling in 2015 with focus on G sand resource delineation for Ande Lumut in Indonesia and so forth, a lot more is yet to fall in the platter.


2015 Exploration Schedule (Source – Company Reports)

With the quarterly report awaited, there will be much more to unwrap about the latest forecasts on 2015 oil production. We understand that in case the Company fails to meet guidance of about 55 million barrels of oil, the situation may be little jeopardizing. In fact, with a view that there may not be further downside in falling oil price and an expected recovery underway, sector valuations may fall a little with free cash-flow yields remaining healthy in some time from now.


Capital Expenditure Guidance (Source – Company Reports)

A large cash-flow deficit is expected in 2015 with non-discretionary capex to complete GLNG and domestic gas projects, ahead of expected growth in operating cash-flow from 2016. A much lower capex in 2016 is expected. STO may like to strategize in case the low oil prices prevail for longer. This may revolve around short term plans to avoid or mitigate external funding by reducing or underwriting DPS and/ or asset sales.

Given the potential approach STO may take for revival and sustenance, we reiterate a BUY recommendation for this stock at the current price of $7.21.

 
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