Santos (ASX: STO) had a solid year in 2013. The company's share price climbed 31% as it ticked off milestones on its two major liquid natural gas projects (LNG) and pulled in record quarterly sales revenues.
However the company still has a lot going for it and here are three big reasons to buy the company in 2014:
1. Growing cashflows
With the completion of Papua New Guinea LNG in 2014 and Gladstone LNG in 2015, Santos expects operating cashflows to double by 2016. This will come as a result of massive production increases as well as higher margins through cost control and long-term pricing.
Longer-term, Santos has forecast a compounded annual growth rate of 6% out to 2020, at which point the company will be producing 80-90 million barrels of oil equivalent (mmobe) annually.
Santos has committed to returning more capital to shareholders as cashflows rise, which means bigger dividend cheques each year.
2. Huge pool of cheap reserves
Santos commands a massive bank of 2P oil and gas reserves across all its markets. At the company's current enterprise value (market capitalisation + net debt) of around $15 billion, these reserves are also among the cheapest pools of reserves on offer from Australia's large energy producers on an Enterprise Value/2P reserves ratio.
|
Company |
Enterprise Value ($ billions) |
2P reserves (mmobe) |
EV/2P |
| Santos (STO) | 14.99 | 1,406 | 10.66 |
| Origin Energy (ORG) | 20.86 | 1,637* | 12.74 |
| Oil Search (OSH) | 13.61 | 552.4 | 24.63 |
| Woodside Petroleum (WPL) | 34.13 | 1,231 | 27.73 |
*Reported as 6,807 PJe. Approximately 1,637mmobe per Santos conversion calculator.
Source: 2013 company annual reports.
3. A stronger U.S. dollar
Exchange rates fluctuate frequently and can work both for and against a company, however analyst consensus on the U.S dollar for the year ahead seems bullish, with many anticipating a strengthening of the U.S. dollar in 2014 on the back of an improving U.S. economy.
Santos and the other listed energy producers like Woodside Petroleum (ASX: WPL) and Oil Search (ASX: OSH) stand to benefit over the short-term as oil is priced in U.S. dollars.
Foolish takeaway
There can be plenty of risks to buying oil and gas producers, but growing cashflows, a comparatively cheap pool of energy reserves and a stronger U.S dollar offer three big reasons to add Santos to your portfolio in 2014.
