Australia | Jan 23 2009
This story features SANTOS LIMITED.
For more info SHARE ANALYSIS: STO
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS
By Chris Shaw
One issue for resource companies in recent months has been while commodity prices generally have fallen sharply costs have not declined at the same rate, a trend that appears to have been confirmed by the Woodside ((WPL)) December quarter production report.
In the view of JP Morgan the result was a disappointing one as it indicated production costs were much higher than had been expected, the result being while production itself was broadly in line with market expectations, the company has provided earnings guidance well below what had been anticipated.
As the broker points out, management has now indicated 2008 earnings will be in a range of $1.75-$1.8 billion, which is 18% below what JP Morgan had been expecting and a full 23% below the previous consensus forecast in the market. The lower result reflects a number of factors, including some asset write-offs, condensate excise charges and adverse foreign exchange movements, but in the broker’s view it is still a disappointing outcome.
Credit Suisse agrees, pointing out the impairment charges announced on some of the group’s US assets are likely to become an ongoing issue and therefore a drag on earnings as the value of these fields are impacted by lower commodity prices.
One positive according to JP Morgan, was the announcement of US$800 million in new debt facilities, though the stockbroker continues to expect the company will need to raise an additional US$2.2 billion over the course of 2009 and this will lift group gearing to a little above 50%.
UBS also saw the new debt facility as a positive as it expects the market will take the view an equity raising to fund capital expenditure requirements is now less likely. This implies some reduction in pressure on the share price, but this is largely offset, in the broker’s view, by the changes to earnings post the result. These changes impact on both its valuation and price target.
Factoring in the changes sees UBS cut its earnings per share (EPS) estimates by 14.5% in 2008 to 274.8c and by 2009 by 5.4% to 139.8c, while JP Morgan has reduced its numbers by 18% and 9% respectively to 258.6c and 130.9c. Deutsche Bank’s numbers have been cut to 259c from 328c and 154c from 173c in 2008 and 2009.
While the FNArena database shows consensus EPS estimates of 292.1c for 2008 and 208.5c for 2009 it must be noted not all brokers have yet updated their forecasts post the company’s update yesterday, meaning this number is likely to fall further.
The changes announced to date have seen the average price target on the stock fall to $43.12 from $43.90, with UBS making the largest change to date in cutting its price target to $49.06 from $55.16. Despite the reduction, the broker continues to rate the stock as a Buy as it sees long-term growth from new projects and likely increases to reserves.
In contrast JP Morgan rates the stock as a Hold, suggesting at current levels there is better value in the likes of Oil Search ((OSH)) and Santos ((STO)) as they both offer better upside to valuation and have potential positive catalysts in coming months from their respective LNG projects.
In contrast the broker suggests the most likely shorter-term catalyst for Woodside is via Pluto-2 but this requires securing gas feedstock and appears to be already priced into the stock at current levels. Deutsche Bank has a similar Hold rating reflecting its view the outlook for both oil prices and foreign exchange movements is relatively flat at present. Overall the FNArena database shows a total of three Buys, five Holds and two Sells on the company.
Shares in Woodside this morning are weaker in line with the overall market and as at 11.05am the stock was down 60c or 1.7% at $34.16. Its range over the past 12 months is $26.81 to $70.51.
Click to view our Glossary of Financial Terms
CHARTS
For more info SHARE ANALYSIS: STO - SANTOS LIMITED
