Santos (ASX: STO) is no slouch when it comes to positioning itself to take advantage of local and Asian demand for liquefied natural gas (LNG).
Santos operates in the exploration, development, production, transportation and marketing of hydrocarbons. It produces natural gas for Australian, Indonesian and other Asian markets. Santos has developed an oil and liquids businesses in Australia, Indonesia and Vietnam.
Currently its main focus is on LNG, having interests in four LNG projects. Its share of the Papua New Guinea LNG project is 13.5% with first production due the second half of 2014. In Queensland it has 30% interest in LNG at Gladstone, scheduled for production in 2015. It has an 11.5% interest in the Darwin LNG project, which comes on stream after that time. Santos has a 40% interest in Bonaparte Gulf LNG, which is at the conceptual stage, and looks like a floating liquefaction project.
Santos has interests producing oil and gas in three main areas, including eastern Australia, Western Australia and the Northern Territory and Asia Pacific. Eastern Australia includes Cooper Basin, Southern Australia, Queensland Coal Seam Gas (CSG), Queensland Conventional Hydrocarbons, and New South Wales CSG; WA and NT include Carnarvon, Bonaparte and Amadeus; and Asia Pacific includes Papua New Guinea, Indonesia and Vietnam.
The 2P (proven plus probable) reserve stands at circa 1,406 million barrels of oil equivalent (mmboe). Total current production has been around 50 mmboe for each of the last two years. However, once the LNG projects are in full swing, it is estimated that annual production will be between 80 and 90 mmboe by 2020.
Most of the work required to develop the massive infrastructure for three of these projects has now been achieved, and that has been accomplished on budget. What is really interesting is that capital expenditure has peaked this year at $4 billion and is budgeted for $3.5 billion in 2014. So, as the company proceeds towards 2020, with three or four LNG projects in production, the cash flow, which is already very satisfactory, should improve dramatically.
Earnings are projected to be 45 cents per share in 2013; 62.0 in 2014; 77.6 I 2015 and 73.8 in 2016 — with a steady dividend of 30 cents for each of those years. The dividend yield is currently 2.1%. Once the LNG projects start to contribute, subsequent years should see significant improvement in earnings and dividends.
Foolish takeaway
Santos has a long history of successfully discovering, developing and producing hydrocarbons, mainly from the Cooper Basin. It has proven management and technical expertise. Using the cash-flow from the Cooper it now is set to exploit LNG in no less than four localities. In addition prices for LNG are expected to increase significantly in coming years. Therefore, Santos is well positioned to take advantage of the growing demand for LNG on the east Coast of Australia and Asian countries, including China. In conclusion for the long term Santos is worth accumulating, preferably when there is any major pull-back in overall market sentiment.
