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Three reasons to add Santos to your portfolio

One approach for a strong performing portfolio is the ‘pyramid’ approach where the base of the portfolio is made up of well established ‘core’ companies and comparably smaller percentages are then allocated to faster growing companies and smaller speculative companies respectively.

The base of the pyramid though holds the majority of the portfolio’s value and may be made up of seasoned operators like Telstra (ASX: TLS), National Australia Bank (ASX: NAB) and QBE Insurance (ASX: QBE).

Energy explorer and producer Santos (ASX: STO) has many of the characteristics that make a great ‘core’ stock for your portfolio. Here are three reasons to consider adding Santos to your portfolio.

Stable, reliable earnings

Some investors shy away from energy producers because of the fluctuations in earnings from one year to the next. Santos has maintained very stable production volumes over the last five years, deviating little from an average 51 million barrels of oil equivalent (mboe).

In spite of this, sales revenue has grown significantly as the price of energy, especially natural gas, has increased. Sales revenues have grown from $2.18 billion in 2009 to $3.22 billion in 2012 on almost flat sales volumes. For second quarter of 2013 the gas price received by Santos was 16% higher year on year, continuing the trend.

Big growth

‘Core’ portfolio companies aren’t renowned for big growth, but that is exactly what Santos is set to deliver over the next two years as two huge LNG projects it is involved in move toward completion. These include the PNG LNG project, which is 90% complete, and GLNG, which is 60% complete.

The projects are set to come online in 2014 and 2015 respectively, which will lift production while the lower capital requirements will contribute to a strong lift in net profit.

Stable management

Santos is not known for high turnover of senior managers, a positive reflection of the stability within the company. CEO and Managing Director David Knox has been at the helm for five years and has over 30 years of industry experience.

Foolish takeaway

The three factors combined give weight to the argument that Santos is a core company to hold as part of a balanced portfolio. The added prospect of a growing dividend as cashflows increase over the next two years is icing on the cake.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.

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