Santos Ltd (ASX: STO) shares surged 5% on Friday after a similar size rise in the US benchmark West Texas Intermediate crude oil price overnight. Santos' share price now sits at around $7.90, nearly 15% above a low of $6.96 reached in December last year but a long way from its 12-month high of $15.32 in August.
Time to Buy?
I must admit, I was looking at Santos very closely when the share price was around $14 as an entry point to the booming Chinese energy sector, however in the end I was put off by the activity and plans of the Russians and US.
Now that the share price has essentially halved from those levels, albeit with a similar fall in the price of its key product (oil), investors and analysts are asking if now could be the time to buy.
Bull points for Santos are the start of production from its 90% complete GLNG project, its existing low-cost production in Australia, and potential for dividend growth, however most of these are dependent on a higher oil price.
Double Your Money?
The long-term oil price is a huge point of conjecture among analysts. Most I've read concede that the current price around US$50 per barrel is unsustainable, however the long-term price guestimates range from US$70 to US$110, which obviously impacts the valuation of Santos' shares.
The analysts at Morningstar recently reviewed their thesis for Santos and maintained their long-term oil price assumption of US$100 per barrel, indicating a fair value per share of $18, some 130% above the current share price.
The analysis considers that at an oil price of US$35, Santos is worth $5, and that further equity would be required to keep debt at manageable levels, but at the base-case US$100 per barrel Santos remains a buy.
Playing the Long Game
Great investors like Warren Buffett tell investors that occasionally the share market is on sale and that truly spectacular returns are only achieved by taking full advantage of those times. This could be one such opportunity, however before investing I would want to be very confident that I understood the oil market enough to believe in a long-term price of $100 per barrel.
