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Three promising signs for Santos investors

Investors responded positively last week to the announcement of Santos’ (ASX: STO) first half 2013 results. Shares in the company jumped up 3.8% as investors absorbed the announcement and it compared to a drop in the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) of 0.7%. For investors there are three especially promising factors behind this.

1. Costs are down

Production costs for the first half of the year were down 5% from $351 million to $335 million, the equivalent cost of $13.70 per barrel of oil equivalent (boe). This was attributed to cost savings and lower costs in the Cooper Basin where production was also down.

This is significant at a time when labour and energy costs are rising and threatening the competitiveness of Australia’s LNG exports. Woodside Petroleum (ASX: WPL) shelved plans for an onshore LNG processing plant for its Browse Basin resources because rising costs made the project uneconomic.

2. Gas prices are up

Higher gas prices over the last 12 months helped Santos to achieve record sales revenue for the first half of the year. Sales of gas, ethane and LNG make up 74% of the company’s production and the average gas price received was 11% higher than first half 2012 at $5.52 per gigajoule.

Natural gas prices are rising because of accelerating demand, but a limited increase in production in the last 12 months. According to industry monitor Platts, the monthly average price for LNG for August delivery to Asia rose 6.8% from July. This was caused by higher than normal summer temperatures increasing demand as well as the lower availability.

This is likely to be a continuing trend over the next 12-18 months as demand keeps rising, but Australia’s LNG projects await completion.

3. Big growth is just around the corner

The company’s two main projects, GLNG and PNG LNG, were reaffirmed as being on track and on budget. This is one of the big risk factors faced by Santos and is fantastic news for investors. The projects have been well managed given their scale and the involvement of joint venture partners and with the completion of GLNG expected in the first half of 2014 cash flows should accelerate in the near future.

Foolish takeaway

The three indicators point to a strong company which is poised profit handsomely over the next few years. Santos maintains strong liquidity to meet its coming capital expenditure obligations and should soon see a positive return coming from these investments.

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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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