Australia | Dec 11 2006
By Chris Shaw
Exploration success for an oil and gas company is usually met with some share price appreciation, but the recent success by Santos (STO) at its Barossa operation has been all but ignored by the market as investors continue to focus on the potential impact of the mud slide disaster at Banjar Panji in Indonesia.
The problem for the company, and the market as a whole, is there is currently no way of knowing just how big the disaster may prove to be and how much it will cost the companies involved. Santos has an 18% stake in the project, along with PT Medco at 32% and operator Lapindo Brantas, which has a 50% stake.
The mud flows have been caused by a mud volcano, which is a naturally occurring phenomenon in Indonesia. Currently mud is flowing at a rate of 100,000 to 150,000 cubic metres per day, with attempts to stop the flows to date proving unsuccessful. Under threat are towns, roads and a railway, so if the mud continues to flow the damages bill is likely to be quite high.
As Intersuisse points out, even Santos is finding it difficult to get an accurate handle on how much the disaster may cost, as the company’s update last week showed it is still trying to get access to all the relevant information.
The company has estimated a total damages bill of around US$800m, while its stake is forecast to be something around US$180m. While it suggests it has sufficient insurance to cover the costs Deutsche Bank points out it may not be able to claim the costs on insurance if the operator can be shown to have been negligent.
Intersuisse expects the company will lift its estimate for required compensation by the end of the year, an outcome GSJB Were agrees with. The broker is forecasting total costs of US$1.1bn, compared to the current estimate of US$800m.
Another issue is will Santos be required to pay more than 18% of the costs, as Intersuisse notes there is some question about whether Lapindo Brantas will be financially able to meet its share of any claims.
Deutsche is also concerned about such an outcome, the broker noting there is likely to be legal action taken against Lapindo in an attempt to prove it had been negligent, which could also impact on whether Santos can successfully claim on insurance.
The issue continues a strong wave of bad news for Santos, as it follows the company’s failure to gain an additional stake in the Cooper Basin and the trumping of its bid for Queensland Gas Company (QGC), as well as a downgrade to reserves at the Jeruk field.
Given the latest uncertainty Deutsche continues to suggest investors sell the stock, a view shared by GSJB Were. SB Citigroup sees the concerns over potential payouts as overdone though, the broker retaining its Buy rating.
The broker is on its own with a positive view as the FNArena database shows the stock as rated Hold six times, Reduce once and Sell twice compared to the solitary Buy rating. The average share price target is $10.91, while Deutsche has possible the lowest price target at $9.00.
Santos shares today are trading slightly higher in line with a stronger broader market, as at 1.20pm the stock was up 3c at $9.85.