STO - the facts

I hold Santos, but I know the risks. Lower oil for longer is needed to kill the shale producers. I also believe this poses a huge risk to Santos.

Lets look at the facts:

santos has a debt to equity ratio of 61%. Interest payments now run at about A$300mln per year. Last year Santos (with average oil prices of US$50) generated A$1bln operational cash flow. After capital raisings in excess of A$3bln, they reduced net debt from A$7.9bln to A$7.2bln (about A$700mln). They diluted shareholdings by 56% and the total equity held by shareholder s went up 8%. retained earnings have gone from A$3bln in '12, to A$10mln now.

The company does not generate enough cash to cover short term liabilities. ST liabilities are being paid with debt. This has been the case since 2013. If we take out the cost of investing or financing, then STO generates 34c for every A$1 of sales. Woodside generates 66c...

STO, since 2012 have achieved approx 16% efficiency determined by net sales revenue divided by total assets. That again compared to WPL at average 28%...

Looking at ROCE, STO has shown negative returns since 2013, and prior to that returns of about 4% - again comparing to WPL at average 12% returns and a slight positive return in 2015 vs negative 14% for STO in 05..

Looking at numbers supplied by Citi & JPM, and showed on AFR, STO has share price sensitivity to oil of 150% for every US$10 change in oil price (2016) - compare that to WPL 100% and OSH 75% and we can see the risk profile of STO, with unknown oil prices is HIGH.

Oil has fallen 65% since 2012 - STO has fallen 69%. WPL has fallen 7% (current as at 31 dec 2015).

Looking at directors notes on A Reports we can see that WPL has a very disciplined approach, citing target debt/equity levels of 25% with 10~30% range during cycles. They are very focused on low cost operations, diversity of ca[pital employed per project etc etc. STO does not have this discipline.

Granted, if you are an oil bull then STO has tremendous upside from this low base - BUT if you truly feel shale producers are getting squeezed out, then believe that STO is also a target of the same squeeze, and as it has been funding itself for 2 years through debt - it is not a viable operation at these levels.

Oil has fallen to c US$30 since 2016. That is US$20 per barrel less than STO recorded in 2015. Looking at thesensitivyity numbers above, we can see that has a 300% negative effect on earnings.... We had all better hope and pray that oil rebounds, as there won't be any lenders willing to offer more debt, and capital raisings are going to be done based on junk status.....

Management have done their financial management based on 1 thing - greed. Decisions made when prices were US$78~110 have burdened this company with a pile of debt that is un-managable (NO consideration to downside risk), and unless prices rally (for some reason I cant think of) then I am worried that this will go down in history as one of the worst managed major companies of the ASX200 Energy index in recent history.

I still hold but am sorry to say I will be offloading my holdings into any rally towards A$3.85.