The ghost of negative oil

If 2020 proved to be a year of reckoning for equities in general, it was oil stocks that faced some of the heaviest selling pressure more specifically.

This was not without just cause: oil plunged precipitously last year, as a supply-demand crunch slapped the all-important commodity to multi-year and historic low. As has been covered extensively, oil hit negative US$37 per barrel in April 2020 and no one really knew what would or could happen next.

The market recovered though, oil producers hedged their positions, and the sector has power on.

Indeed, when Santos (ASX: STO) yesterday posted a very strong set of interim results – covering the first-half of FY21 – it should not come as a significant surprise. The comps in these periods were decisively easy – owing to just how terrible the first-half of 2020 was. The comps however will be less easy going forward, potentially explaining the skittish reaction from investors on Tuesday.

Interim results in focus

On the top-line, the company reported a 22% bump in revenue, with total interim sales coming in at a record US$2,040 million. That was driven by strong sales volumes of 53.8 million barrels of oil equivalent (MMBOE) and production of 47.3 MMBOE – during the half.

'The results reflect higher oil prices compared to the corresponding period due to recovery in demand but were offset by lower average LNG prices due to lagged oil-linked pricing in long-term LNG offtake contracts,’ Santos management said. For reference, brent crude last traded at US$69.30 per barrel, well off the lows it recorded in 2020.

This all translated into a strong earnings performance, with Santos delivering earnings (EBITDAX) of US$1,231 million against a net profit of US$354 million, up 222% year-on-year.

Free cash flow for the June half was US$572 million.

Off the back of that, Santos' Board declared a US 5.5 cents per share interim dividend, fully franked, up 162% on the interim dividend paid a year ago. That is equivalent to 20% of the energy company’s first-half free cash flow and in line with Santos’ dividend policy to payout between 10-30% of free cash flow in the form of dividends.

Commenting on those results, Santos MD and CEO – Kevin Gallagher – said:

'These results again demonstrate the resilience of our cash-generative base business and strong operational performance across our diversified asset portfolio.'

The analyst perspective

Analysts from RBC continue to favour Santos, reiterating their Outperform rating and $8.00 price target in the wake of the interim results. Here the investment bank said:

‘Santos is our preferred pick amongst the Australian energy sector large caps. We like the defensiveness inherent in Santos low-cost operating model, which is free cash flow neutral at ~US$28/bbl.’

Santos finished out Tuesday's session down 0.81% to $6.16 per share.

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Shane Walton | Financial Writer, Australia
18 August 2021