Long Term Future of Santos, page-36

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Tizard

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02/05/20

21:14

Post #: 44400587
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Originally posted by RoyE: ↑

Hi Tizard, as Ajax explained a hedge is different to a Hedge fund. The hedges STO has put in place for some of its oil production i.e. locking in a set price for deliveries of a set amount of oil for delivery in the future would have been done with a major trading Bank (the bank trading desks provide buy/sell markets for commodity producers/consumers including for oil producers/consumers), or possibly in the futures market. Therefore, the hedges carry no/very minimal credit risk to STO in terms of the counterparty going broke and not being able to honour the hedge with STO.

Other points to note re the current situation in the oil market:

1) Demand has been smashed by Covid19 so currently there is a global oversupply of oil
2) Saudi Arabia and Russia recently had a fallout re respective production levels which caused the oil price to crash (concerns re oversupply into a market when demand was falling due to Virus). They have now agreed on some production cuts (cuts of 10 million barrels per day, roughly 10% of global production)
3) As a result of 1 & 2 above, the oil price has crashed and so has the price/value of oil shares globally
4) This has in my opinion created a once in a generation buying opportunity because:

- Covid's effect will diminish over time and oil demand will recover
- The producers who are feeling the pain the most are the American shale producers and the Canadian oil sand producers. They produce approx 13% of global supply and their average production cost is around USD 40/barrel. Since the current market price is USD 20/barrel they are going broke in large numbers (many of them also have high debt levels which puts them under even more pressure).
- The demise of the US producers is expected to remove significant production from the market (possibly 5-10 million barrels/day
- The Aussie producers are much better placed than the Americans to ride out the storm since their production costs are generally lower and their debt levels are much lower.
- So, the way I see it in 12 -24 months we should be in a situation where the higher cost producers have gone broke/closed down and the oil price has recovered to say USD 40 per barrel and oil demand has recovered (post Covid19)
- At this time, the strong Aussie producers/developers (STO, WPL, BPT, SXY and CVN) will be thriving again and I expect their share prices will be significantly higher than they are today.

IMO & DYOR

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Great synopsis, thanks for taking the time write your post
Cheers

STO Price at posting: $4.56 Sentiment: None Disclosure: Not Held
3 Upvote

0 Great analysis

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