LNG and oil explorer and producer Santos Ltd (ASX: STO) suffered some of the heaviest share price falls as a result of the cratering oil price around the turn of the year, as investors feared it would have to raise capital to support its balance sheet.
However, those fears appear to have dissipated somewhat as Brent oil futures firm up above US$65 and WTI futures edge up towards US$60. That's a long way off some of the dubious predictions that oil might slide toward US$30 a barrel later in the year.
While it's generally a mistake to look backward when making investment decisions the long-term history of the oil price demonstrates how it tends to recover after unexpected price shocks. In this instance it appears as though tapered supply will act as a catalyst to support firmer prices.
Global demand for energy in different forms is unlikely to decline over the medium term and Santos will deliver much of its LNG to fast-developing Asian markets. The recent US$70 billion mega-merger of LNG giants Royal Dutch Shell and BG Group is another indication that LNG fuel assets are likely to be attractive into the future.
Santos says it has $2.6 billion in liquidity to meet the company's current operating and growth commitments, although it has also slashed costs and capex in response to the tanking oil price. Capex is down 44% this financial year, alongside a 10% reduction in production costs.
However, its overall financial health is linked to the price it takes on selling its products just like others such as Woodside Petroleum Limited (ASX: WPL), Oil Search Limited (ASX: OSH) or Senex Energy Ltd (ASX: SXY).
All of which might still be at attractive prices for those who think oil and LNG prices will climb higher out to 2016. However, investors should only look to buy price taking, capital-intensive businesses like these when they're at cyclical lows..
Especially because there are much better businesses to buy and hold for the ultimate blue-chip retirement…
