While Santos maintained that its $18.5 billion Gladstone LNG mega-project was cash-flow positive at $US40/barrel and a foreign exchange rate of A80c/US dollar when its first cargo was sent on October 16, Brent crude was $50.46/bbl that day.
The world has changed since then, with Nymex crude falling below $30/bbl last Friday for the first time in 12 years, and the US Energy Information Administration doesn't think the glut will ease up until well into next year. Brent dropped again to $28.73 yesterday.
Modelling using Brent's price on January 13 ($30.31), JP Morgan found that by subtracting Santos' $5.447 billion net debt from its $2.883 billion enterprise value, the SA oiler had an equity value of -$2.664 billion and a share price of -$1.51/share.
JP Morgan initiated coverage on Santos with an ‘underweight' rating and a $A2.75/share December 2016 price target, after the bank halted its Australian oil and gas coverage briefly when analyst Ben Wilson left in May 2015.
JP Morgan's new oil and gas analyst Mark Busuttil says Santos is "unlikely to be cash flow positive" at spot commodity prices given GLNG is still very capital intensive, estimating that the mega-project is costing about $A900 million a year between now and 2020.
Unless prices improve, Busuttil says Santos could need another capital injection unless prices improve.
After resisting an equity raise for months, Santos finally relented to what some investors deemed inevitable last November and announced a $3 billion capital raising and the placement of $500 million in shares to Chinese group Hony Capital to pay down its $8.8 billion debt mountain.
On the upside, JP Morgan said that compared to Woodside Petroleum and its one-time takeover target Oil Search, Santos had the greatest earnings and value leverage to oil price changes due to its still-high debt levels and the high cost nature of its assets.
Therefore in a rising oil price environment - which is the bank's base-case - Santos' stock could well outperform its peers.
"Nonetheless, we believe commodity price risks point to the downside and consensus downgrades will act as a strong headwind for the stock," Busuttil said.
Notwithstanding commodity price movements, former Clough CEO Kevin Gallagher, who starts his rescue mission at Santos on February 1, could provide a welcome catalyst for Santos.
"We believe further asset sales are possible - which considering the point in the cycle could be made at lower than full value," the analyst said.
"It remains to be seen what priorities he sets for Santos and if he makes widespread changes once he starts. However, some things that could come from the management change include large asset impairments and/or the reintroduction of asset sale process.
"Overall, we believe a key focus has to be on increasing institutional investors' interest in the stock - noting that retail investors hold 92% of shares outstanding according to Bloomberg."
Having given Santos the GLNG project as his legacy, tying the company's future, to an extent, to Asian demand growth, David Knox stepped down as CEO last November once the strategic review was completed.
While Santos could be in for an after-tax impairment of about $A850 million having been forced to reduce its too-optimistic oil price assumptions by $US5/barrel, a $15/bbl revision in oil price expectations will see the impairment increase to $A2.4 billion.
JP Morgan also said Santos' disclosure and financial accounts were "by far the most complicated" compared to Woodside and Oil Search.
As Santos' 15 assets are combined into four business segments (Eastern Australia, WA & NT, Asia Pacific and GLNG) makes assessing performance and value of individual assets difficult.
That, and the fact that there are a number of intercompany and third-party sales agreements, led the bank to the conclusion that it has "much less confidence" in its earnings forecasts and asset valuations for Santos than its peers.
