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









 
The S&P 500 was up by 34.40points or 1.74%on Wednesday to 2007.14 points. U.S. stocks extended gains on Wednesday after the Federal Reserve gave a strong signal that it was on track to raise interest rates sometime next year, suggesting confidence in the U.S. economy. The central bank said it will be patient on the timing of an interest-rate increase, replacing a pledge to keep borrowing costs near zero for a “considerable time,” and raised its assessment of the labor market.

All 10 S&P sectors were sharply higher, though energy was in the lead by a wide margin. The S&P energy sector which has fallen sharply with the heavy selloff in oil prices since June, was up 4.9 percent. Despite oil prices dropping fast and the Russian rouble crashing, the Fed excluded any mention of the recent turmoil in the global economy. The more significant message was of the United States' ability to stand on its own.



S&P 500 Daily Chart (Source – Thomson Reuters)
S&P ASX 200was up by9.6points or0.19%on Wednesday and closed at 5161.9 points. Australia’s biggest oil producer, Woodside Petroleum, gained 3 per cent to $35.50. Resources giant BHP Billiton rose 0.3 per cent to $27.51, while Rio Tinto jumped 1.4 per cent to $53.38. Commonwealth Bank of Australia edged up 0.1 per cent to $81.02, while Westpac Banking Corporation fell 0.8 per cent to $31.33. ANZ Banking Group dropped 0.9 per cent to $30.47, and National Australia Bank shed 0.5 per cent to $31.35.
Telstra Corporation lifted 0.7 per cent to $5.76, after earlier in the session touching $5.80, while Medibank Private fell 0.4 per cent to $2.28. In retail, Woolworths fell 0.2 per cent to $29.14, while rival Wesfarmers, owner of Coles, added 0.4 per cent to $40.52. Outdoor advertiser oOh! Media closed 1.6 per cent below its $1.93 offer price at $1.90, while Latin America focused online auto classifieds operator LatAm Autos ended its first session 18.3 per cent below its 30¢ per share offer price at 24.5¢. BC Iron was the top performer on the ASX 200 rising 16.67%.

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


 
Stock of the Day - Santos (BUY)

Today’s report focusses on Santos (STO) that recently declared the reduction of its projected 2015 capital expenditure to $2.0 billion from the previous guidance of $2.7 billion. The reductions are expected from growth projects with Cooper gas growth capex reduced by $150m, other growth capex (Narrabri etc.) reduced by $250m, and exploration spend cut by $100m.

STO’s strengths in terms of financial position even during the substantial fall in the oil price have been reaffirmed. The Company is on track to realize the cash flow benefits in 2015 and 2016 from its growth investments in recent years. STO reported its strong funding position with about $2 billion in cash and undrawn debt facilities available as at 30 November 2014. Further, the Company maintained its 2015 production guidance at 57 to 64 million barrels of oil equivalent.


Business Outlook (Source – Company Reports)

The Company forecasts its growth and sustaining capital expenditure at $1.4 billion and $600 million respectively, for 2015. Asset divestments remain under consideration as part of the Company’s ongoing portfolio management, provided fair long-term value is realised. This nevertheless appear to affect STO’s longer-term growth options. The Company neither plans nor intends to raise equity in near-term.

Other updates include PNG LNG project producing at full capacity and 90% completion of the GLNG project with on-track progress for the first LNG in the second half of 2015. Further, first commissioning gas is expected to be introduced to the LNG plant before the end of 2014. The Company reported that offtake agreements are already in place.

At this juncture, Standard & Poor’s has reduced STO’s senior unsecured credit rating very recently (from BBB+ with negative outlook to BBB with negative outlook) but as per STO it appears that the new rating is the same as that of players such as Origin Energy, Amcor, AGL Energy, Crown Resorts and Boral.  S&P did mention about STO having a track record of a conservative funding approach, favorable debt maturity profile and adequate liquidity. Further, S&P noted that project execution risks are waning with PNG LNG starting production in April 2014 and GLNG 90% complete in November 2014. The investment grade credit rating from S&P has been retained.


Asia Pacific Strategy (Source – Company Reports)

To maneuver the current volatile oil price, the Company aims to focus on driving operational efficiency, reducing costs, pragmatically managing capital to sustain a robust balance sheet without distressing long-term interests of the Company or the interests of its shareholders.


Fairview Hub 4 (Source – Company Reports)

At the investor seminar held on 26 November 2014, the Company stated that it was considering a potential European hybrid issue (€500m) subject to acceptable market conditions. Thereafter, the oil market has experienced considerable volatility subsequent to the OPEC’s announcement of maintaining existing production levels. In view of the same, the Company decided to defer any hybrid issuance till the time the market conditions revive and are more conducive with regards to issuing such instruments. This hybrid issuance was related to proactive capital management and STO had flexibility in the timing of any issue.


Cooper Gas Contracts (Source – Company Reports)

Given the oil price environment, the Company would need to review its spending plans for 2015 with efforts to significantly reduce capital and operating expenditure in view of its recent goals.


Exploration Strategy (Source – Company Reports)

With the updates on targeting 80 to 90 mmboe production by 2020, growing margins and sustainable cash flow, and building a portfolio of high quality assets across Australia and South-East Asia, the Company aims to have good capital discipline focus along with maintaining or increasing the dividend with rise in earnings and cash flows.


Browse and Bonaparte Basins (Source – Company Reports)

In the midst of little turbulence, exploration success for PNG LNG and other developments such as Cooper infill and NSW CSG development may serve as growth catalysts. Overall, the investment signals may look sundry but appear to be positive from a long-term standpoint. With expectations such as increase in spot gas prices on the east coast of Australia by 2016, there may exist an opportunity for the Company.


STO Daily Chart (Source - Thomson Reuters)

STO’s story thus urges to engage further. Accordingly, we put a BUY recommendation for this stock at the current price of $7.58.
 

 
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