First is the here-and-now story, which on current guidance numbers looks to be below par and that is highlighted by today’s production guidance which has seen a further one million barrels of oil equivalent (mmboe) taken out of guidance to see the calendar year 2013 finishing at 51 mmboe.
The reasoning for the guidance contraction is due to STO holding back additional production all year. So far STO has had three downgrades to production numbers this year.
However this is where STO’s long dated story comes to the fore. The reduction is partly due to the fact STO is concentrating on delivering gas supply for the $70 billion Gladstone LNG project which is due to start taking supply in mid-2014 for the first export shipment in the early part of 2015.
STO’s long dated projects are now only months away; STO’s PNG LNG project due to commence exports early in 2014, the project is on time and on budget and this has not changed in over 10 months. The asset is a tier-1 project with a long dated pipeline. Which brings me back to the GLNG project which is even bigger still, is well supplied and will be the flagship of STO’s gas portfolio.
STO continues to see increased contractions at its Cooper basin development which could be further developed in the years to come.
The other disconnect between STO’s share price and the current environment is natural gas is currently touching yearly highs and has risen over 24% year-to-date. At STO’s last quarterly update it achieved a record price extraction of approximately $5.65 a kilojoule and saw revenues coming in well above expectations. STO is very well positioned to take advantage of this difference once more and exploit the gas price over the coming 18 months.
I am a firm believer in the gas story and can only see Asian demand continuing to ramp up. It is a medium to long term call and one that will take time to develop.
However, on a short term call STO is currently testing what has been a heavy resistance level throughout July and August of this year; and that is $14 (a level that was broken in May 2012 and saw STO fall to $10.04 as of mid-August 2012) so it is a key point for investment psyches.
Therefore if the line is broken, even in the face of the medium term company fundamentals, STO could see a further $1 coming off the share price in a very quick period. If this is the case, trade would be to sell at market with a stop loss at $14.15 and a limit all the way to $13.25 as the momentum trade will drive it this low.
However, if the market fundamentals kick in and investors look at the natural gas price and the disconnect to the share price, the trade is more likely to reverse. I would want to see the $14 resistance level holding and would buy at market with a stop loss at $13.90 and a limit at $15.10, which is the top of the positive Bollinger band.