According to an article in the Australian Financial Review, a theoretical exercise by Credit Suisse equity analysts has made the startling finding that Santos’s equity is worthless when current oil prices and foreign exchange rates are assumed to persist forever.
The article assumes oil prices at $US 55.20 a barrel and the Aussie dollar at US 80.6 cents. It also highlights the price per share impact of oil stocks such as Woodside and Oil Search which Credit Suisse energy analyst Mark Samter has a net present value at around half the current trading price based on the above oil stock assumptions.
Santos is an oil stock perceived to have a weak balance sheet and high debt. It is at risk of a downgrade of its credit rating which may put more pressure on its share price even after a 50% drop from the highs.
Those traders who traded gold stocks in 2013/14 know it is very difficult to time the lows of a falling market. It’s human nature to perceive value based on recent market prices. We as traders tend to be attracted to reversion to the mean type trades when shock moves occur.
I see traders take excess risk with reversion trades in a time frame that is too short in relation to the weak market dynamics which can lead to serious account depletion before a new trend develops. From my experience as a professional trader I find patience is key. Wait for evidence that selling is exhausted and look for prices to “base” before jumping into mean reversion trades.