After several decades of successfully developing its interests in the Cooper Basin of South Australia, Santos (ASX: STO) is nearing production of Liquified Natural Gas (LNG) from New Guinea in the second half of this year and Queensland in 2015.
Production figures of 51 equivalent million barrels of oil equivalent were given on 23 January, just 1 million barrels shy of last year's figure but a 21% increase in sales revenue due to improved prices. The really good news, however, was that plans for the two LNG projects are on schedule and close to budget.
The Cooper Basin is in decline with 50 to 55 million barrels of oil equivalent (mmboe) group production maintained by a myriad of smaller operations. Despite the oil price nearly doubling during the last decade, earnings per share plateaued due to stagnating output and declining liquids volumes.
Santos expects a much brighter decade ahead with oil and gas production to increase by 60% to more than 75 mmboe thanks to new east coast coal seam gas. Santos boasts some of the largest and highest-quality coal seam gas reserves in Australia. East coast LNG should attract export pricing and indirectly drive domestic sales to export parity. Gas-hungry Asian markets attract prices triple Australian levels, and the potential to direct east coast volumes there will pressure prices locally. Santos's enviable domestic infrastructure footprint drives enhanced returns at minimum cost.
Other players in the LNG space include Woodside Petroleum (ASX: WPL), Oil Search (ASX: OSH) and Origin Energy (ASX: ORG). Woodside is already producing LNG at its Pluto plant as well as from the North West Shelf in Western Australia. Pluto is proving to be an exceptionally profitable operation, but endured considerable relatively large cost over-runs during development.
Oil Search is also close to production in New Guinea and Queensland. The Papua New Guinea LNG project is 29% owned by Oil Search and 13.5% by Santos, with Exxon Mobil (NYSE: XOM) having a 33.2 % interest. Origin also is going to be a Queensland producer in a few years. On the Australian east coast, Santos has access to the major source of gas through its coal seam and conventional reserves. That is similar to Woodside, which produces its own gas for its west coast operations.
For Santos, Papua New Guinea LNG is over 90% complete and on track for first LNG in the second half of 2014. The Gladstone LNG project in Queensland is over 72% complete and on track for first LNG in 2015. Amongst other developments in the report yesterday, Santos noted that for December 2013, gross oil production from Chim Sáo, Viet Nam, was 29,000 barrels per day.
Foolish takeaway
Santos has delivered an average annual rate of return of 12.8% to shareholders over the last 10 years. Earnings of 61 cents per share are expected to increase to 93 cents per share in 2015. With a price-to-earnings ratio of 23 currently, the price will rise as earnings appreciate. Over the next five to 10 years, there is plenty of blue sky based on two LNG facilities, plus coal seam gas production for LNG and east coast domestic sales, with a significant price increase expected domestically.
This stock is a long-term investment for growth and increased dividends. I'll be buying shares if there is any general pull-back in the share market and the price drops a dollar to around $12.50.
