Shares in Woodside Petroleum Limited (ASX: WPL) have been impressively resilient despite the sell-off in energy stocks that has squashed its competitors in recent months.
Part of the reason is Woodside's strong financial position, pipeline of upcoming projects, appetite for acquisitions, and its strong dividend.
Fellow producer Santos Ltd (ASX: STO) also has a strong pipeline of projects and given the pummelling shares took in 2014, they offer strong appeal for the bargain hunter.
While both companies have a lot to offer, deciding to buy one is also an implicit decision NOT to buy the other. With that in mind I've developed a little chart to illustrate the differences between Woodside and Santos:
| Company | Woodside Petroleum | Santos |
| 2014 production | 95.1 mmboe | 54.1 mmboe |
| 2015 forecast production | 86-94 mmboe | 57-64 mmboe |
| Cash at bank | $3.2 billion | $0.775 billion |
| Total debt | $2.6 billion | $7.49 billion |
| 2015 capital expenditure | $1.12billion, plus $5b on Apache assets | $2 billion |
| Reserves | 1,599 mmboe proven + probable | 1,245 mmboe proven + probable |
| Contingent resources | 4,374mmboe | 1,721mmboe |
| Trailing P/E | ~10 | ~16 |
Comparing Woodside and Santos is like comparing big apples with small apples. Is a big apple better, more tasty? How would you determine that in an objective way?
Ancient Greek philosophers used to answer life's great questions by finding 3 'self-evident truths' (statements that are obvious and incontrovertible) and drawing conclusions from those. This might sound a little arcane but stick with me because it's an approach that's quite useful in this situation:
1. Significant uncertainty exists in global oil and gas markets
Oil and gas prices have fallen due to market events outside the control of Woodside and Santos. Future prices depend on OPEC and US gas/oil production, as well as other figures like Asian demand growth. Globally there are indications that coal is again viewed as a viable alternative to natural gas; coal power plants might be commissioned in lieu of LNG ones. Will this be the rule for future years or an exception? There are many unknowns.
2. Lower debt and higher cash balances create less risk
If two companies were identical in every other respect, you'd choose lower debt and higher cash balances every time. Carrying lower debt and having more cash on hand improves both flexibility, and the ability to resist or respond to market shocks. If you accept that point #1 is true, this point is also a given.
3. There is a trade-off between price and growth
It's very rare to find a smaller but rapidly growing company trading for a lower Price to Earnings (P/E) ratio than a larger, but more slowly growing company. The way the market works, investors accept greater risk by paying a higher premium for expectations of a higher reward.
If point #3 is also correct, investors are effectively choosing between the security of Woodside Petroleum and the greater risk of Santos.
Woodside Petroleum has more cash, less debt, trades on a better P/E and will probably pay a better dividend. It's more resilient to market shocks, and its strong finances put it in a great position to snap up opportunities – which it is doing already. On the down-side, production (and thus income and probably dividends) will fall this year and lower capital expenditure could carry over to slower production in the future.
Santos is much riskier, but it is growing production and spending heavily which should see it expand more rapidly, especially if a current slowdown in global LNG/oil capital expenditure leads to a shortage in 2020 as the International Energy Agency is predicting. Both companies have solid long-term futures ahead of them, but Woodside appears to offer the safer bet while Santos' appeal is in its growth prospects.
