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Santos: It’s a gas

Santos Limited (ASX: STO) has today reported a 48% fall in first half net profit to $262m, compared to last year (2011’s numbers included a number of asset sales). The company’s underlying profit rose 20% to $283m, beating analyst expectations. The market certainly liked the result, with Santos shares rising 3.2% to $11.78 at the close.

During the half, Santos produced 25.4 mmboe (million barrels of oil equivalent), a rise of 11%, which contributed to sales revenues rising 27%. Production for the full year is expected to be between 51 and 55 mmboe.

But Santos’ future is all about gas.

The company is ramping up its capital expenditure as it looks to get two liquefied natural gas (LNG) projects into production. GLNG or Gladstone LNG, in which Santos owns 30%, is expected to come on stream in 2015, whilst its PNG LNG project (13.5% interest) is on track for first production in 2014.

The company also has an interest in another two LNG projects. Santos has an 11.5% stake in Darwin LNG, operated by ConocoPhillips, and a 40% interest in Bonaparte LNG, a proposed floating LNG project in the Timor Sea.

Like other LNG companies, Woodside Petroleum Limited (ASX: WPL), Oil Search Limited (ASX: OSH) and Origin Energy (ASX: ORG), Santos has faced increasing costs getting the LNG projects up and running. GLNG was recently upgraded to cost US$18.5 billion, while PNG LNG is expected to cost US$15.7 billion.

You can see why companies such as Santos have to share the costs associated with these mega-projects. For Santos to fund its share of the development costs, it has taken on around $3.5 billion of debt. The majority of that debt is not due until 2017, by which time the company will be hoping to have both GLNG and PNG LNG producing gas and liquids.

Santos is not just sitting on its hands and waiting either. The company has an interest in Australia’s first commercial shale gas well, and first sales are expected later this year. It also has other oil and gas projects coming online to add to its existing producing assets.

The Foolish bottom line

Santos looks well on its way to becoming a major Australian oil and LNG supplier. Investors will need to watch the costs of the two current LNG projects. Any further delays or cost blow outs are likely to have a major impact on the company.

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Motley Fool writer/analyst Mike King owns shares in Woodside Petroleum. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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