Oil and gas producer Santos Limited (ASX: STO) has undergone big changes in the last few years which have put the company on track for a sustained period of growth going forward. For current and prospective investors the changes mean there are some key points to be aware of to understand the company's new direction.
1. Substantial, cheap reserves
Since 2008 Santos has increased proved and probable (2P) reserves by 842 million barrels of oil equivalent (mmobe), while pumping out only the equivalent of 255 mmobe.
This net gain of reserves supports the company's claim to 1,368 mmboe of 2P oil and gas reserves across Australia and Asia and puts the company in a strong position to meet rising demand going forward. These reserves are also comparatively cheap for investors when compared to current equity value (EV).
Although Santos has similar reserve levels to Woodside Petroleum Limited (ASX: WPL) (1,436 mmobe), a comparison of each company's EV/2P ratio suggests investors can buy Santos' reserves much more cheaply with a ratio of 13.4 compared to Woodside's 23.09.
2. Capital expenditure profile
Santos increased capital expenditure by 28% in the 2013 financial year, forking out $4.1 billion as it continues to fund the development of its two major projects: Papa New Guinea LNG and Gladstone LNG.
With PNG LNG almost complete, capital expenditure is expected to fall back to $3.5 billion in 2014. Forty percent of this ($1.4 billion) will go towards completing the US $18.5 billion GLNG project which Santos holds a 30% share of.
3. Forecast production growth rate
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. This compares to 2013's full year production of 51 mmobe. Santos also signalled that the significant increase in cash flows that come from the production growth will fund growing dividends for shareholders.
Foolish takeaway
With a large pool of comparatively cheap reserves ready to be put into production and a declining capital expenditure profile, Santos' cashflow growth is set to accelerate strongly over the next six years. As well as funding higher dividends for investors, some of this cash is likely to be used to drive new exploration in pursuit of the next phase of growth.
