The oil patch's new Great Uncertainty

IT WOULD be easy for Slugcatcher to say that Santos is shaping as Australia’s biggest victim of the oil price correction though that’s only because it’s been the first to reveal a financing problem.
The oil patch's new Great Uncertainty The oil patch's new Great Uncertainty The oil patch's new Great Uncertainty The oil patch's new Great Uncertainty The oil patch's new Great Uncertainty

ENB's infamous Slugcatcher

Staff Reporter

Other companies are almost certainly suffering a similar bout of uncertainty triggered by the sharp fall in the oil price, and an expectation that it could fall further.

The difference is purely one of timing.

Or, to put it more bluntly Santos got caught with its pants down in the form of a €500 million euro-bond issue which had to be withdrawn before any funds were raised after being warned that there was no appetite in the current climate for oil-linked debt.

The damage to Santos can be measured in its share price which has fallen by more than 30% over the past two weeks compared with 12% falls by Woodside and Oil Search.

But, the damage is far more widespread than to the companies producing oil and gas because it will spread to government budgets, the performance of service companies, and to the reputations of high-paid investment analysts who (a) failed to see what was coming, and (b) still can’t agree on what happens next.

Santos, as well as being a loser on the stock market, is also proving to be a handful for stock brokers who cannot agree on whether the company has been oversold and is therefore a buy, or whether it is a falling knife and could cut the fingers off a buyer because it has further to fall.

Two of the biggest international investment banks active in the Australian market, Credit Suisse and Citi, are concerned that Santos might have further to fall, telling clients last week that the stock was set to underperform – even after its 30% decline.

Macquarie, the leading local investment bank, disagrees. It reckons Santos will outperform the market.

To put a few numbers on the difference of opinion Credit Suisse sees $9.10 as a 12-month target price for Santos. Macquarie reckons it will rise to $14.50.

It’s not often that you see such a wide gap in share-price tipping by professional analysts, partly because they normally stick closely together to avoid being seen as too different from the pack, and partly because the valuation process incorporates a set of agreed variables – such as the future oil price.

In today’s market, all bets are off because even the highest-paid analysts with the most heavily polished crystal ball really doesn’t have a clue what comes next, as this sample of forecasts illustrates:

  • Deutsche Bank reckons Australia’s crop of new LNG projects will emerge relatively unscathed from the oil price downturn and even the coal-seam gas to LNG projects nearing completion will not be badly damaged;

  • Citi reckons that the market reaction to what’s happening with the oil price has created buying opportunities among the oil service companies with its North American research team advising clients to “buy the fear”

  • JP Morgan can see problems emerging in Australian exploration with major participants likely to pull back from riskier projects with one example cited by Chevron’s participation in the Nappamerri Trough unconventional search;

  • Macquarie reckons Beach, AWE and Sino are good defensive investments for clients interested in the Australian mid-tier oil sector, whereas Senex and Karoon are high-risk stocks which “we prefer”.

Similar views are being expressed around the world as industry learns to live with what could be a long-life oil glut rather than the long-life oil shortage which had been expected.

One of the most significant developments in Europe is a sudden bout of concern that oil at $US70 a barrel, or lower, represents the kiss of death for the North Sea oilfield as it battles the ills of old age.

Urgent meetings are underway in London to see whether additional tax breaks are needed to prevent North Sea fields from being run down to the point of closure.

In the US, oil traders are having fun placing bets on where they think the price will go with the gloomiest putting money on a fall to as far as $40/bbl.

The reality is that the no one knows what comes next, whether the oil price will stabilise around $70, or continue to fall as a flood of excess liquids hit the market.

The only certainty at times like these is that only the very brave or very foolish will be taking risks in case $40/bbl oil becomes a reality – fingers crossed that doesn’t happen.

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