I once heard someone describe professional poker as "a hard way to make an easy living".
The same could have once been said about oil producers too, but not today.
Uncertainty around the future price of oil and gas makes it hard to evaluate prospective earnings for even well established companies, while those with debt on their balance sheet, like Santos Ltd (ASX: STO), are being tossed out on their ear.
But before you cast aside your shares in Santos, here are three strong reasons to keep a stake in your portfolio.
1. East coast exposure
Demand for gas to the east coast is forecast to triple in the next three years driven by huge demand from the three key LNG projects (GLNG, QCLNG and APLNG), as well as continuing domestic demand. However there are conflicting reports about whether the demand can be met.
The Australian Energy Market Operator (AEMO) noted in April that between 2015 and 2019 no regions should expect supply gaps, but energy consulting firm EnergyQuest believes the AEMO have undershot demand from Queensland's big LNG projects and over shot the potential gas supply from the Cooper Basin.
EnergyQuest expects production from the Cooper Basin region could fall in response to the slashing of capital expenditure budgets by companies like Senex Energy Ltd (ASX: SXY) in response to the plummeting oil price.
The result would be tightening demand and a big increase in the price paid for domestic wholesale gas. Santos would be uniquely positioned to win from this demand, first through its GLNG joint venture and secondly through its significant existing Cooper Basin assets.
2. The Aussie dollar is going nowhere fast
The price of oil has been inching down in the last month, but so too has the Aussie dollar against the U.S. dollar. And I feel it's unlikely to change direction any time soon.
There are a lot of factors that drive currency flows, but slowing demand for key exports like iron ore and coal will continue to slow the Australian economy and hamper the AUD.
This is ideal timing for Santos as capital expenditure costs slow and LNG sales, tied to U.S. dollars, rise.
3. A growing dividend?
Santos has in place a 'progressive' dividend policy which aims to increase distributions to shareholders as cash flows grow from its new projects.
As I noted in a recent Dividend Report Card for Santos, although the recent low oil price will reduce operating earnings in the short term, the completion of the GLNG project will result in an expected 44% drop in capital expenditure, increasing free cash flows which can be used to pay back debt and reward investors.
