Low Oil Prices Hit Oil Search and Santos (ASX:OSH)

Oil prices collapsed back in April.

The world in lockdown meant less global trade, less driving, less travelling. In other words, oil demand collapsed.

To counter the effects, oil producers agreed to cut 9.7 million barrels per day, or 10% of the global oil supply.

Still, Brent crude is hovering above US$40 a barrel, much lower from the US$70 a barrel at the beginning of the year.

Low oil prices hitting Aussie energy companies

Today Oil Search Ltd [ASX:OSH] released their quarterly results. While production was down by 1%, total revenue for the second quarter 2020 plunged by 26% compared to the previous quarter. The company reported a revenue of US$266.2 million, down from U$359.4 million in the previous quarter.

The main culprit for the collapse in revenue is the drop in oil and gas prices.

Average realised oil and condensate prices fell from US$49.51 per barrel in March 2020 down to US$23.05 in June. Average realised LNG and gas prices went from US$9.08 per million British thermal unit (mmBtu) to US$7.34 per mmBtu during the same period.

The bleak price outlook for oil and gas has already caused Oil Search to announce last week a non-cash write-down of between US$360 million and US$400 million before tax (AU$517–575 million) this year. You can read more on this here.

And, speaking of write-downs…

In an announcement today ASX energy producer Santos Ltd [ASX:STO] said they will be writing down the value of their assets between US$700 million and US$800 million before tax…also because of low oil prices.

The biggest hit is on Santos’ Gladstone LNG, with a US$640–700 million hit but also exploration assets mainly in the Cooper and Amadeus Basins.

The impairment is expected to increase Santos’ debt by 1.5%.

Santos Managing Director Kevin Gallagher said Santos ‘announced in March financial measures including reductions in capital and operating expenditure, and a target 2020 free cash flow breakeven oil price of US$25 per barrel.

Our disciplined operating model combined with the proactive measures taken to reduce expenditure saw Santos generate more than US$430 million in free cash flow in the first half of 2020 despite significantly lower oil prices.

While they didn’t deliver great news, both companies are clocking in gains today

At time of writing, the OSH share price pushed 2.5% higher while STO is up by 2%.

Still, with low demand and more perspectives of lockdowns, we think there are better investments out there.

Check out editor Greg Canavan’s new report ‘Five Bounce Back Stocks to Watch during the Market Crash (5 Stocks to Survive the Coronavirus Crash)’. In this free report, Greg gives you five stocks he believes will survive the pandemic.

You can access this free report here.


Selva Freigedo

Selva Freigedo is a research analyst for The Rum Rebellion.
Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.
Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.
Selva has also lived in Brazil, Spain and the USA.
Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…
She has seen first-hand what happens when bubbles burst.
Selva joined Port Phillip Publishing’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

Leave a Reply

Your email address will not be published. Required fields are marked *

The Rum Rebellion