Investing in a resource business is rough. Unless you buy a stock with a significant margin of safety, share price action is likely to test your wills.
Santos Ltd [ASX:STO] is one such business. Their earnings follow the price of natural gas.
If natural gas prices skyrocket, it’s happy days for Santos shareholders. But if prices dive, sellers trying to get out could push the stock lower.
Of course, you could also just turn off your screen and hold on regardless of what the stock price does. Yet there are very few investors that do this.
Santos fell as much as 2.7% this morning, to a low of $3.55 per share. The giant natural-gas producer is now down more than 10% year-to-date.
What happened to Santos shares?
This morning, Santos released their first-quarter activity report.
The company reduced net debt by US$400 million, to US$3.1 billion; it increased liquefied natural gas (LNG) production to 1.4 million tonnes; and it forecasted a cash flow breakeven point of US$34 a barrel.
Santos CEO Kevin Gallagher commented on the results, stating:
‘Our costs have again been reduced, we have improved our free cash flow position and our net debt has been lowered.
‘Our 2017 forecast free cash flow breakeven now stands at US$34 per barrel. This is a significant reduction from the US$47 per barrel market at the beginning of 2016.’
What now for the STO share price?
This all sounds like great for Santos, right?
I wouldn’t rush into Santos just yet. The company’s financials are improving. But their future earnings potential is still subject to the price of natural gas.
So if you want to invest in Santos, you’ll want to be confident that natural gas has a long-term upwards trajectory. I’d encourage you to read more about how the gas industry could evolve over time before making a large investment in Santos.
Junior Analyst, Money Morning
PS: Resources are back in business after their revival in 2016. The six month-long flurry of investment in the resource sector has sparked a string of fast, three-digit gains on some mining stocks.
Saracen Mineral Holdings is up 163.1%; Whitehaven Coal has soared 152.9%; Mineral Resources is 138.2% higher; Fortescue Metals Group gained 116.6%; and St Barbara Ltd is up 114%.
According to resources analyst Jason Stevenson, this is only the start.
In a new Money Morning report, ‘The Top 10 Australian Mining Stocks for 2017’, Jason introduces you to 10 cheap, top-quality Aussie mining stocks that look set to soar as this year’s commodities comeback pushes ahead.
To get your free copy of Jason’s report, click here.