With energy giant Woodside Petroleum Limited (ASX: WPL) making an audacious $12 billion takeover bid for Oil Search Limited (ASX: OSH) earlier this week, there has been renewed speculation of Santos Ltd (ASX: STO) becoming a takeover target. With investors considering the merits of Santos as a takeover play, here are four good reasons why it is hard to justify.

Balance sheet

Santos' balance sheet is in a poor state. Its FY2015 half-year presentation delivered last month showed its net debt as at 30 June was $8.8 billion. The majority of this debt is denominated in USD, meaning it is impacted by the AUD/USD exchange rate. Since June, the AUD/USD exchange rate has depreciated a further 7 cents. By Santos' own calculations, this increases its net debt by approximately $700 million, which puts the current net debt figure closer to $9.5 billion. With a market capitalisation hovering around the $4.5 billion mark, and even accounting for proposed asset sales, it will be hard to avoid a capital raising.

Commodity prices

Santos is operationally leveraged to the oil and gas price. To combat the 47% reduction over the past 12 months in the average realised oil price, it has reduced capital expenditure by more than 50%, and unit production costs by 11%. But it hasn't been enough. To remain free cash flow positive, it needs to sell oil at US$45 to US$50 per barrel at an AUD/USD exchange rate of between 70 cents and 75 cents. At present, neither metric is in its favour.

Australian dollar vs U.S. dollar

Which brings us to the AUD/USD dilemma. Within the next 6 to 12 months, many financial commentators are predicting the Aussie dollar will drop to the mid-to-low $0.60s. At 65 cents, net debt would reach a staggering $10 billion. An upshot would be an increase in the value of its U.S. assets, as well as operating cash flow, but that is little compensation against such a large debt.

Share price

Santos is down 45% year to date, and almost 70% in 12 months. But this doesn't mean the company is "a bargain". A takeover target needs to be attractive in more areas than just price. The fundamentals in Santos don't stack up at present, and it is difficult to pinpoint a company that could make a deal work.

Foolish takeaway

Santos is facing strong head winds with high debt levels, low oil and gas prices and a depreciating Australian dollar. Investors would be foolish to ignore the high risks of investing in Santos in the vain hope of a takeover offer emerging.

The post 4 reasons why Santos Ltd is no takeover target  appeared first on The Motley Fool Australia.

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Mining stocks have experienced a turbulent ride over the past 18 months, with those in the gold sector no exception. Despite several gold stocks enjoying a significant bounce from their yearly lows, such as Northern Star Resources Ltd (ASX: NST) and Evolution Mining Limited (ASX: EVN), there are still opportunities. One of those opportunities is Regis Resources Limited (ASX: RRL).

Regis is an Australian-based gold production and exploration company. Its core operation is at the Duketon Gold Project in the North Eastern Goldfields of Western Australia, which consists of three main deposits in Moolart Well, Garden Well and Rosemont. Both Garden Well and Rosemont support robust mining schedules, and have long mine lives exceeding seven years and six years respectively.

The company has sought to extend the operational mine life at Moolart Well also, with the recent acquisition of the Gloster Gold Deposit. This deposit is strategically located 26 kilometres from Regis' Moolart Well processing plant, and has an historic resource estimate of 365,000 ounces.

In its most recent quarterly report, Regis announced it had $51.7 million in cash and $21.4 million in gold bullion. Cash holdings more than doubled in value over the quarter, and the cash position increased an incredible $100 million for the 12 months to June 2015. The company has also reduced its debt level to just $20 million, which is covered easily by available cash.

Regis has reduced operational costs over the past 12 months whilst increasing operating cash flow. It expects to generate operating cash flow of around $140 million in FY 2016, with expansion capital expenditure expected to be in the order of $15 million to $20 million for the same period.

At the mid-point of FY 2016 estimates, the company expects to produce 290,000 ounces at an AISC (all in sustaining cost) of $1,020 per ounce. This makes Regis one of the most competitive gold producers in the Australian market.

The company has also been prudent in managing its gold sales and hedging. Regis has hedged a total of 281,000 ounces at an average price of $1,437 per ounce. These hedges are not subject to a specific delivery schedule, meaning the company can choose to sell its gold at either the spot price, or the hedge price, depending on which is more profitable.

Regis has indicated it will resume dividends later this year, targeting a payout ratio of 60% of net profit after tax. A dividend target of between 5 cents and 7 cents a share indicates a dividend yield of between 3.4% and 4.7%, which is much higher than that presently offered by Northern Star and Evolution Mining.

The company also has an opportunity to improve the value provided by its Garden Well project. The project accounts for around 35% of production, but has a low recovery rate of just 83.9%. An increased recovery rate would lead to a decreased AISC and a further boost to profits.

Foolish takeaway

Regis Resources is a well-managed gold producer with low debt, long mine life and cash in the bank. It has a good hedging policy, expects to resume paying dividends later this year, and has the opportunity to boost profits further. If you are looking to add a gold stock to your portfolio, Regis Resources should be at the top of your list.

The post Those looking for a gold play should consider Regis Resources Limited appeared first on The Motley Fool Australia.

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As commodity prices have tumbled over the past 12 months, so have the share prices of mining services providers. Whilst more than just a mining service provider, WorleyParsons Limited (ASX: WOR) has not escaped a sharp decline in its share price.

WorleyParsons is 50% off its year high, and trading at levels close to 10-year lows. The decline in commodity prices, the decrease in capital expenditure in the oil and gas industry, and a profit downgrade have all contributed to negativity around the stock.

WorleyParsons has not been resting on its laurels though. It has been active in reducing costs and realigning its business to meet current market conditions. In May this year, it announced it was cutting 2,000 jobs, on top of the 4,000 jobs it had already cut during the preceding 18 months. And 12 months before that, it reorganised its business into three lines – Services, Major Projects, and Improve – to reduce corporate overheads and establish a more competitive cost structure.

It has taken other cost reduction measures including transitioning IT costs from fixed to variable, releasing excess floor space, increasing occupancy levels in offices, and transferring selected operations to lower cost execution centres. These changes are only just starting to trickle through to the balance sheet.

The half-year results, delivered in February this year, showed revenue was down only 8.4% from the previous corresponding period, with profit after tax down by 7%. In fact, profit after tax actually increased by 3.6% for the half-year, when taking into account previous revaluation of investments.

As capital expenditure in the oil and gas industry continues to shrink, WorleyParsons has switched focus to the more stable, operational expenditure side of the ledger. It has already begun to see some positive results in this space, with several smaller contract wins, and expects this will assist in maintaining revenue levels going forward.

The company's diverse earnings base means the loss of a major contract or two should not have a significant impact on overall revenue, and in turn, profits. The top 10 group contracts account for only 15% of overall revenue, with the majority of earnings coming from smaller contracts.

Due to the operational changes it has implemented, WorleyParsons expects to see annualised savings of between $75 million to $100 million from the 2016 financial year. It has more than $400 million cash on the balance sheet and strong cash flows. This is a great position from which strategic, bolt-on acquisitions of smaller industry players can be made.

The consensus 12-month price target of $10 represents upside of around 13%, whilst expected dividends of 64 cents give a dividend yield of 7.3%. Given the positive steps taken by WorleyParsons, I think the share price target is on the conservative side.

Foolish takeaway

WorleyParsons has been working hard to control costs, maintain revenue, and diversify earnings over the past 12 months. It has already foreshadowed a lower full-year profit, and I expect the annual result, due on August 26, will surprise the market. If the result exceeds expectations, it would be a good indicator that it has successfully adjusted to market conditions, and a share price recovery should follow.

The post Why you should consider WorleyParsons Limited for your portfolio  appeared first on The Motley Fool Australia.

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Back in mid-2007, Transpacific Industries Group Ltd. (ASX: TPI) was a market darling. In the preceding 12 months, the share price had increased 130% to $10, and profit had grown by more than 100%. But then the Global Financial Crisis (GFC) hit markets around the world.

Suddenly, the $2 billion plus debt it carried became a lead weight on the share price, and it lost all of its gains in the following 12 months. Fast forward seven years and the share price is languishing around 72 cents. So is the stock a buy at current levels?

Transpacific is one of Australia's leading waste management companies. It provides commercial, industrial and residential collection services for general waste, recyclables and construction and demolition waste. It also operates complementary services, including waste transfer stations, recycling facilities, quarantine operations and waste treatment operations.

In February this year, the company reported a half-year net loss of $41.7 million. The result was down from the $167.1 million it reported in the first half a year earlier. According to Transpacific, the net loss was mainly a result of adjustments related to "impairments of its hydrocarbons business and costs associated with the fleet grounding in August 2014".

Transpacific is currently mid-way through a restructure. It is in a much better position than it was a year earlier, having sold its New Zealand waste disposal business, and reduced its long-term debt to $54 million.

To assist in the restructure, Vik Bansal has been appointed chief executive. Bansal was most recently the chief operating officer at Valmont Industries Inc., and was heavily involved with rebuilding the company. He was also instrumental in generating strong revenue and earnings growth. This could prove to be a timely appointment for Transpacific.

The purchase of the Melbourne Regional Landfill business from Boral Ltd. (ASX: BLD) in February was a strategic acquisition that will strengthen and protect the Cleanaway business. It allows Transpacific to deliver and process collected waste to its own site, rather than a third party, which should drive enhanced cash flows and higher returns.

Future growth prospects for the industry are positive, with the compound annual rate predicted to be 4.4% through to 2020-2021. This is much higher than the GDP growth in Australia over the same period, which is predicted to be 2.8%.

The consensus 12-month price target of 82 cents represents upside of almost 15%. Two asset managers have also shown faith in the stock recently. Ellerston Capital and Schroder Investment Management Australia have taken substantial holdings in the stock, at 8.73% and 7.28% respectively.

Foolish takeaway

Transpacific looks like a potential turnaround story, and appears attractive at these levels. It has embarked on a transformational restructure and brought in a CEO with strong credentials. The annual result on August 21, containing the full-year profit and fiscal outlook, will provide clarity on whether now is the right time to buy.

The post  Is now the time to buy Transpacific Industries Group Ltd.?  appeared first on The Motley Fool Australia.

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It has been almost six weeks since Flight Centre Travel Group Ltd. (ASX: FLT) reported a downgrade in its 2015 underlying profit before tax to between $355 million and $365 million. This was its second downgrade in a little over six months, and the market punished the stock accordingly, pushing it down by more than 20%.

Whilst the downgrade represented a 7.5% fall in underlying profit, the stock is still trading down 15% from its pre-downgrade price. This represents an excellent opportunity to buy a quality stock before the market realises it has treated it too harshly.

Flight Centre is one of the world's largest travel agents, and has been the industry leader in the Australian market for many years. In fact, 60% of its earnings are from the Australian market, which in turn generates almost 80% of its profits.

For many years analysts have predicted that digital disruption would cripple Flight Centre. More recently they have raised concerns that the company is losing market share to locally listed players Webjet Limited (ASX: WEB) and Corporate Travel Management Ltd (ASX: CTD), and U.S. travel giants Expedia and Priceline.

Flight Centre is a strong brand with a long history of growing revenues and expanding, while dealing with constant change in the travel industry. Its resilience is underpinned by its strong cash flow and balance sheet, with roughly $500 million in cash available. It is forecast to deliver a full year, fully franked dividend of $1.55 per share, which represents a 4.3% yield – not too shabby when you look at current bank interest rates.

The company has a history of steadily increasing dividends, and going forward, the franked dividend is forecast to rise to $1.62 per share in 2016, representing a 4.5% yield. This yield compares favourably to that forecast for Webjet and Corporate Travel Management. And don't forget the company has a growing overseas presence from which it expects to unleash higher earnings and profit in the future.

The consensus target price amongst analysts currently sits at $39.83. At the last close price, this represents over 10% upside if the analysts have it right. The stock is still 25% off its yearly high, so there could be more blue sky to come.

Foolish takeaway

There is no doubt Flight Centre faces short-term headwinds with wage pressure, a slowing domestic market and a continuing decline in the Australian dollar. Still, I believe Flight Centre will be a much larger business in the future. With its healthy dividend yield, it represents a good buy for income investors at current prices, with the added potential of share price growth.  

The post Is Flight Centre Travel Group Ltd a good income buy?  appeared first on The Motley Fool Australia.

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