Romano Sala Tenna

Prior to the oil price collapse, Santos Limited had the highest forecast earnings per share growth profile of any of the large capitalisation companies on our grid. Fast forward 6 months and the oil price has very clearly diverted investor focus away from earnings growth and onto the balance sheet. Whilst we acknowledge that the debt levels are not ideal, Santos does have a suite of true long life assets that will generate above average returns through the cycle for 3+ decades. We therefore see the current weakness as representing an opportunity to buy a piece in a future 'cash cow' at a 'clearance sale' price. As we can see from the table, Santos has fallen substantially further than its peer group: i.e. Santos has declined 36.1% versus Woodside at 13.0% and Oil Search at only 9.1%. And of course a statistical anomaly is that should we see a 'reversion to the mean' and each stock simply returns to its previous price level, the return on Santos would be 56.4% versus 14.9% for Woodside and 10.0% for Oil Search.



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Dean Morel

Santos may be a great buy based on its future cash flows, but your use of reversion to the mean is anchoring by another name.

Romano Sala Tenna

Yes correct. Whilst 'anchoring' can be a dangerous psychological weakness, the whole thesis of this piece is that if it is the oil price that has driven the weakness, then when the oil price rebounds the weakness will abate. This is predicated upon the central tenet that it is the oil price that has driven the weakness in the STO share price - not anything related to the company itself.