After a standout year in 2013 which saw the company's market capitalisation rise by as much as 31%, Santos Limited (ASX: STO) is on track to benefit from a bumper year of production and revenues in 2014. Here are some key points for investors considering Santos this year.
A solid balance sheet
The company's financial year mirrors the calendar year, and this year will also be one of substantially lower capital expenditure for Santos. This will help to bulk out the company's balance sheet as cashflows rise and capital expenditure drops back allowing an option to reduce debt.
The company's capital expenditure jumped to $3.4 billion in 2012 as it invested heavily in its two big projects: PNG LNG, in which it owns a 13.5% share, and Queensland's GLNG in which it holds a 30% stake and will be operating. Capital expenditure was set to peak in 2013 at approximately $4 billion, including a forecast $2.5 billion on the PNG LNG and GLNG projects.
Bulging production
PNG LNG is on track for completion this year, closely followed by GLNG in 2015. Combined, the projects will significantly increase annual production. 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 52.1 mmobe in 2012.
The recent weakening of the Australian dollar and forecasts of a lower exchange rate against the U.S. dollar throughout 2014 will be positive for Santos and the other listed energy producers including Woodside Petroleum Limited (ASX: WPL) and Oil Search Limited (ASX: OSH). All stand to benefit over the short-term as oil is priced in U.S. dollars.
Santos has very favourable prospects heading into 2014 in my view. However these prospects do not come cheap. At $14.51 per share Santos trades at a price-to-earnings ratio of 26. This compares to 10.6 for Woodside Petroleum and around 11 for smaller producer Beach Energy Limited (ASX: BPT).
Foolish takeaway
Given the long-term growth profile and prospects of a growing dividend in the short term, the current share price may be acceptable for many investors. However, investors looking for a real bargain should add the company to their watchlist in the hope of buying at a lower price.
