Should you buy Woodside Petroleum or Santos?

Two of Australia's biggest energy companies, but which one is right for your portfolio?

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Australia's two energy titans, Woodside Petroleum (ASX: WPL) and Santos (ASX: STO), could be good cornerstones for your portfolio. Both are quality companies with large reserves of oil and natural gas and solid strategies for long-term growth. But which one should you buy?

Company size

Both companies are sizable and rank among Australia's 200 biggest companies on the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO). Woodside has a market capitalization of $10.1 billion, while Santos sits around 40% higher at $14.44 billion.

However in terms of proven and probable reserves (2P) held, the two companies are reasonably similar. Santos has 1,406 million barrels of oil equivalent (mmboe), while at the end of 2012 Woodside had 1,544 mmobe.

Performance

In terms of production performance, Santos currently lags Woodside. For the first half of 2013 Santos generated $271 million after tax on production of 24.5 mmobe. Woodside pulled in a first half 2013 profit of $873 million after tax, producing 41.9 mmobe.

Full year guidance provided by the two companies estimate final production of 52-55 mmobe for Santos and 85-89 mmobe for Woodside. Relative to Santos' lower production and higher market capitalization, Woodside starts to look reasonably attractive. However, Santos is expecting to see a big rise in production over the next three years as a number of significant projects come online.

Santos (ASX: STO) Woodside Petroleum (ASX: WPL)
Market Cap (billions) $14.4 $10.1
Share Price $14.74 $37.38
2P Reserves (mmobe) 1,406 1,544
2013 Forecast Production (mmobe) 52-55 85-89

Growth strategy

An important difference between the two is their long-term growth strategies. Santos is highly focused on exploration and production in Australia and southeast Asia, which is reflected the company's large LNG projects in Queensland, Darwin and Papua New Guinea. Using this strategy Santos has forecast 6% annual compounded growth through to 2020 – making the company a steady and reliable source of growth.

Woodside is pursuing a three-tiered strategy to maximize its core business assets, leverage its key capabilities (like ocean exploration and extraction), and grow its portfolio.

To this end Woodside is currently doing a solid job. In the last 12 months the company has announced an agreement in principle to acquire a stake in Israel's Leviathan gas field, expansion in Myanmar and two exploration permits in Ireland's Porcupine Basin.

Foolish takeaway

So which to buy? At today's prices Woodside looks like the best value with higher current production and big prospects — but with higher risk associated with its future earnings. Santos has higher certainty over its future cash flow growth, but this appears to be priced into the company's shares, leaving less margin for safety.

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Motley Fool contributor Regan Pearson does not own shares in any company mentioned.

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