Morning Report / Has Santos put the kibosh on the Energy Sector?

By Market Matters 16 December 16

Has Santos put the kibosh on the Energy Sector?

Market Matters Morning Report 16th December 2016

"Oh, what a difference a day makes" is a phrase so often quoted, it’s certainly applicable to Sydney's weather today - cold and very wet after a few days earlier in the week in the high 30's. The expression also feels very suitable to our Energy Sector after Santos (STO) initiated a $1.5bn capital raising, sucking plenty of buying from the sector, just as it was regaining its "mojo". It's a strange decision to raise capital the night the US Fed intends to raise interest rates and after a strategy day last week that paid no reference to a potential raising.

Apparently the STO raising at $4.06 from institutions was oversubscribed – which is the line coming from the company, however, if that was accurate why did the stock fall 10.7% yesterday to close at $3.94 (versus the placement price of $4.06)? We hear one major shareholder did not participate. This implies that if they were not willing to defend their position (from dilution), they’re a seller of the stock which means continued overhang.

We must remember this is the same board that rejected a $6.88 takeover bid back in October 2015, by Scepter Partners, only to issue new capital at $3.85 one month later in November. The stock then fell another 36% over the following 3 months to be languishing ~64% below the Scepter takeover offer. Unfortunately today even after crude oil’s stellar recovery, STO investors are basically only breaking even from the 2015 issue. We must question whether or not the board was more interested in keeping their jobs rather than accepting the generous $6.88 takeover offer.

Our first conclusion is simple:

We have zero interest buying Santos (STO) at any stage until the board demonstrates some clear intention to restore, or at least to attempt to restore shareholder value.

Santos (STO) Weekly Chart:

Secondly, let's move onto the local Energy Sector as a whole which has clearly benefitted significantly from the recent OPEC decision. The sector has rallied strongly in 2016, following the oil price, gaining 38% at its best prior to the STO influence.

Unfortunately, we are bearish the sector over the next 1-2 years targeting a break of this year's low - you heard it here first, the market is now bullish energy and that concerns us.

ASX200 Energy Sector Monthly Chart

Thirdly we will turn our attention to sector heavyweight Woodside (WPL) and importantly, Origin Energy (ORG) that we own for any short-term indicators of a market we do not want to be exposed to in 2017.

Woodside remains technically positive while it can stay over $30 but if we were long we would sell into any reasonable strength.

Woodside Monthly Chart

Origin Energy (ORG) fell almost 4% yesterday as the sector was sold to raise funds to buy the heavily discounted STO stock - not a switch we would consider.

Short-term we can see a pullback towards $6.25 but our technical target remains over $7. We reiterate that we will not hesitate to sell ORG in the $7 region, which will clearly now take longer courtesy of STO.

Origin Energy (ORG) Weekly Chart

Lastly moving onto the underlying crude oil price, it is starting to struggle when it trades much over $US50/barrel even after the positive OPEC news.

We remain short-term bullish crude oil targeting a test of $US60/barrel but weakness under $US50/barrel will negate this bullish stance.

Crude Oil Monthly Chart

Summary

- We remain short-term bullish oil and thus Oil Stocks – more so WPL and ORG than STO

- Importantly, we will look to sell ORG into any strength nearer $7

- However, if Oil drops below $UD50/barrel that view will change – and we will turn bearish Oil, and likely sell ORG

- Our short term positive view is backed by recent developments from OPEC, however, the market is now positioned ‘long Oil’ and that is a bearish scenario for the next 1-2 years.

Overnight Market Matters Wrap

  • A positive day in the US with the Dow up 0.3% to 19,852 and the S&P 500 up 0.4% to 2,262.
  • Gold was hit hard from the surging US$ and we remain negative Gold at present as mentioned previously. 
  • Iron Ore closed in the green, up 2.9%, however, it did not help BHP closing an equivalent of $25.16 in the US, down 0.7% from Australia’s previous close. 
  • The December SPI Futures is indicating the ASX 200 to open marginally higher this morning, testing 5,550. 

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking  here . Positions are updated each Friday.

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