Ignore the analysts, forget the energy company bosses and turn off the news, because no one it seems, can agree on what the price of oil is going to do next.
The current low oil price environment could well be the new normal for energy producers. If it is, which company is the best bet for investors, Woodside Petroleum Limited (ASX: WPL) or Santos Ltd (ASX: STO)?
Revenues in this new, low oil price environment will be affected by the mix of oil and gas produced, and the pricing agreements each company has for the gas they produce. Here is how the companies compare:
Oil and gas mix
Santos is more exposed to fluctuations in the oil price because the company produces a higher mix of oil than Woodside. For the full year 2014 (FY14) Santos Ltd reported that oil made up 46.5% of product sales revenue, compared to just 16% for Woodside Petroleum, with Woodside's production mix heavily weighted towards gas and LNG.
As well as reducing exposure to oil prices, LNG also has lower production costs per unit, instead requiring higher initial capital expenditure. Woodside's LNG heavy production mix resulted in an average production cost of US$7.41 ($9.45 at current exchange rates) per barrel of oil equivalent (boe) in FY14, while Santos reported average production costs of $14.1 per boe.
Going forward Santos will start to increase its percentage of LNG production as the Queensland GLNG project starts production in the second half of 2015.
Pricing
Woodside noted in its 2014 annual report that global LNG spot prices had fallen about 50% in 2014, driven by the fall in oil prices as well as excess LNG supply due to a mild winter across Asia.
However Woodside's exposure to spot prices will be limited thanks to its use of long-term 'take or pay' contracts. In addition, recent pricing reviews with customers of its Pluto LNG project, which made up 42% of total FY14 production, resulted in a 49% increase in prices received during 2014.
Santos, meanwhile, is increasingly relying on oil-linked pricing. The company's 2013 annual report noted that Santos expects around 70% of product sales to come from oil-linked pricing in 2015 giving the company high exposure to falling oil prices.
So which is the better bet?
Higher LNG production and contracted pricing suggests Woodside is better placed to handle the lower oil price environment. This has been reflected in the company's share price which is down just 5% in the last 12 months, compared to a 40% decline in Santos shares.
Share price volatility will likely continue for Santos going forward, along with the price of oil, however this also means that shares could rise again sharply over the long term if the price of oil regains traction.
