Finally, some earnings news worth writing your home about. Santos (ASX:STO) delivered some welcome news to the share market by announcing a full year net profit of $1.65 billion. That was a 360% increase over the previous year's figure of $360 billion.
The big kicker for the company came from the sale of its 40% stake in its Gladstone LNG project in Queensland. Last May it sold that stake for US$2.5 billion to Malaysia's Petronas. But even if you back out the contribution that sale made to full-year net profits, underlying net profit was still up 42% from $403 million to $571 million.
No business is recession proof. But what you want is a company that can increase earnings without increasing its capital expenditure. Santos sold off a stake in asset whose market value is appreciating. And in the longer-term, Australia's LNG business is positioning itself as an alternative to oil. There's growth to be had. This why the LNG industry has regularly featured in Kris Sayce's tipping over at the Australian Small Cap Investigator.
The sale also gave Santos a year-end cash balance of $1.6 billion, with net debt of $506 million. Any debt in this market is an issue, although Santos says it has an un-drawn credit facility of $700 million. But the key for the company is the asset portfolio. It reckons that will get it through what are turning out to be lean times for everyone-from households to corporations to national governments.
Yes. That is easily the biggest and most disturbing story today. Credit spreads in Europe indicate investors are getting nervous about governments in Spain, Ireland, Greece, Portugal and Italy. The spread between ten-year government bonds in these countries and a ten-year German bonds is widening.
What's more, the credit default swap markets now appear to be factoring in the possibility that certain national governments in Europe may simply default on their debt. Take, for example, Ireland. According to the Times of London, the pledges made by the Irish government to support its banking sector amount to 220% of the country's GDP.
The Irish government has promised to bail out its banks. But who's going to bail out the Irish government? That's what everyone's starting to wonder. And that's why-in addition to the billions in loans made by Western European banks to Eastern Europe-the euro is looking shakier by the day.
But will Germany and France allow a single member of the euro-currency bloc to default on its debt? Not only would it undermine confidence in the Euro has a viable currency, but it would also d set off a mad divergence in the European bond market. "European officials have already expressed concern that their bond market could potentially face a crisis similar to that unleashed by the collapse of Lehman Brothers Holdings Inc. in September," reports Bloomberg.
We've said before that this worldwide financial crisis will take down a few national governments with it and not just big firms. And now you see that it really is possible. As ECB board member Lorenzo Smaghi said, there's now a "risk that the mistrust that there is today in financial markets is transformed into mistrust in states."
Hmmmn. What might that mean?
Well it might mean that more people are beginning to see States in a different light. Rather than seeing states as the (most of the time) democratically elected representatives of the people, people see something much more feudal. They see a set of elites who achieve and maintain their position by looking out for the economic interests of a small group of elites, including themselves.
This is not so different that the clergy, the Crown, or the gentry calling the shots. Different faces. Different trappings of legitimacy. Same result, even though it's several hundred years later.
Granted, even if we live in a kind of indentured servitude today-heaped up with public and private debts that can never be paid off-the standard of living is much higher today than it was in the seventeenth century. You have cable TV, fried chicken, and 3,000 calorie iced coffees. That beats eating dirt.
But whether or not the modern world bears a striking resemblance to the medieval world (with a few bells and whistles) isn't the object of today's inquiry. Instead, we would point out that doubts about the integrity of the global financial system and the institutions that regulate it (governments) are very bad for share markets.
With earnings not likely to recover any time soon, we'd expect to see the market make a new low as the gold price makes a new high. It'll happen sooner rather than later. And after that? Stay tuned...
Dan Denning
for The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Rosie on 19 February 2009:
"$1.65 billion... was a 360% increase over the previous year's figure of $360 billion."
That doesn't compute.
Comment by Peter on 19 February 2009:
Hi Dan,
Is that the ghost of Gono making you type a "b" instead of a "m" (...announcing a full year net profit of $1.65 billion. That was a 360% increase over the previous year's figure of $360 billion.) I suppose its good practice what with the governments around the world about to put the printing presses into overdrive.
Comment by Joe on 22 February 2009:
Revolutions have been started by less inequity than there is in our current societies. That private banks can be bailed out of their mistakes, yet other non bank private companies can not (simply because we can not bail out everyone), demonstrates this aptly.
That our money is now preventing bankers from seeing their corporations fold, and is additionally required to be paid to these said bankers to fund their bonuses. If there was any equity in our World these men would be unemployed and the system they operated to its' own destruction knocked down to the foundations and rebuilt into a new sustainable and equitable model.
It amazes me that politicians and financiers see that the system was fundamentally broken, and yet they attempt to bankrupt us all to maintain a flawed model.
Capitalism is supposed to weed out the weak, and the failed, and reward the strong and successful. Apparently these days it does not.
If my bank folds, that means they have the rights on my asset, my house, and as such, I would be in a position to re-negotiate its' value and offer a fair value price on its' debt. This happens with every other failing organisation as assets and liabilities square up in a resetting of the accounts.
Imagine if this had been done across our economies, it would have rightly wiped the banks out for being insolvent, and reset all those inflated debts realigning back to a realistic value of the assets the debt was secured against.
OK there would have been absolute carnage for a year or two, but, surely this is better than have a decade or more of reallignment and unsustainable tax liabilities, as we attempt to maintain a broken model.
If governments default on their liabilities in international markets, it will be because they have punted the risk upstairs by not drawing the line at private commerce.
The recession the World is seeing now is because banks have no money to lend. Nations have no money to buy goods from others. States have no money to pay for the services they need to provide to their citizens. All we have now is debt and more debt being loaded onto assets desperately over-priced because we let the fundamentals of our economy inflate these values by increasing the supply of unreal money almost without restraint.
My bank has made enough money over my working life from my earnings, and yet now they are entitled to my tax payments too.
It is difficult to see how our bad economic management can be reset without much higher levels of inflation to realign earnings with debt. And that I feel is the inevitable consequence around the globe. If governments default then they will be desperate to inflate away their liabilities.