Despite the market climbing higher this morning, the Santos Ltd (ASX: STO) share price has sunk into the red.
At the time of writing the oil and gas producer's shares are down almost 2.5% to $3.27.
Why have its shares sunk lower?
This morning Santos announced that it plans to recognise a non-cash net impairment charge of approximately US$690 million after tax in its FY 2017 half-year results which will be released on August 24.
The decision was made after the company made changes to its long-term forecast of US dollar oil prices.
According to today's release, management has lowered its Brent oil price forecasts to US$50/bbl in 2017, US$55/bbl in 2018, US$60/bbl in 2019, US$65/bbl in 2020, US$70/bbl in 2021 and US$70/bbl from 2022.
As a result of the changes in its forecasts, Santos expects to recognise an impairment on its GLNG asset of approximately US$870 million after tax.
Furthermore, the company also expects to take an impairment charge against the non-core AAL asset in Indonesia of approximately US$150 million after tax based on its assessment of the impact of lower oil prices.
Thankfully there is a little bit of good news. Although lower oil prices are expected to impact its Cooper Basin assets, this will be more than offset by the cost efficiencies and performance improvements achieved during 2016 which allow for increased drilling activity and production.
This has resulted in an expected positive net write-back to the Cooper Basin carrying value of approximately US$330 million after tax.
Should you invest?
Whilst the company isn't overly bullish on oil prices in the future judging by its forecasts, the hard work management has done at lowering costs does mean that even at these levels it has highly profitable operations.
As I mentioned recently, this year Santos expects to be free cash flow breakeven at US$33 per barrel.
If it can at least maintain these low costs moving forward then it could prove to be a great investment in the resources sector if its Brent oil prices forecasts are accurate.
But whether or not they are accurate is the million dollar question. A lot will depend on what OPEC and U.S. shale producers do next in my opinion.
If you're confident in oil prices then I would suggest you invest in Santos ahead of rivals Woodside Petroleum Limited (ASX: WPL), Oil Search Limited (ASX: OSH), and Beach Energy Ltd (ASX: BPT).
