2014 has been a very different experience for investors in Santos Ltd (ASX: STO) compared to investors in Oil Search Limited (ASX: OSH). That's because, while shares in Santos have fallen by 1.5% year-to-date, Oil Search is up 11% since the turn of the year.
However, both stocks could deliver strong performance moving forward and are very capable of beating the returns on the ASX. Here's why.
Growth Prospects
When it comes to growth potential, few stocks can match the forecast earnings growth rates for Santos and Oil Search. For example, Santos is expected to increase its bottom line at an annualised rate of 39.2% over the next two years, while Oil Search's EPS figures is due to be over 3.5 times higher in 2015 than it was in 2013. Both of these growth rates are simply stunning and show that the two companies are high-growth stocks.
Valuation
Certainly, there is a risk that one or both of the companies won't deliver on their prospects. However, the current valuations of the stocks appear to adequately price in this risk. In other words, current valuations provide a margin of safety in case the hugely optimistic earnings numbers are not met.
For example, Santos trades on a price to earnings growth (PEG) ratio of just 0.56, while Oil Search's PEG is even lower at just 0.29. Indeed, it appears as though the two stocks are offering high growth at a very reasonable price, so that if there are delays to the planned step-up in LNG shipments (which is a key reason for the expected increase in earnings), their share prices may not be hit all that hard in the short term.
Looking Ahead
It's not just earnings that are set to increase at a rapid rate, though. Both Santos and Oil Search could become more in-demand as income plays, too.
For example, while Santos currently yields 2.4%, dividends per share are due to increase at an annualised rate of 39.4% over the next two years. This means that in 2015 (and assuming a constant share price), the company's shares could be yielding as much as 4.1%. Similarly, Oil Search's yield could go from the current 0.7% to 2.8% during the same timeframe.
Although both stocks are strong growth plays, they aren't pure-play growth stocks. Indeed it could be as a result of strong growth prospects and income potential, as well as attractive valuations, that Santos and Oil Search outperform the ASX over the medium term.