More growth planned for Santos in PNG

Oil and gas producer ups the stakes to capitalise on existing investment.

Times are good for Santos (ASX: STO) investors. The company left shareholders grinning last month by announcing record first-half revenues and then topped that off with the news that the PNG LNG project the company holds a 13.5% stake in is 90% complete.

Now the company has announced plans to expand its presence in Papua New Guinea by participating in three new prospective exploration permits in the country’s Western Province. The agreements mean Santos will take a 30% interest in the permits, partnering with privately owned Mitsubishi and Canadian-listed energy producer Talisman Energy.

According to a map issued by Santos, the three permits range in distances of between about 50km to 100km from oil and gas pipelines that run towards the US$19 billion PNG LNG processing plant, suggesting Santos could capitalise on the project further if a gas discovery is made.

The terms of the deal are confidential, so it is not known what the cost will be to Santos and it is still dependent on approval from the PNG government. This should be no issue given that earlier in the year PNG Prime Minister Peter O’Neill declared his desire to open the door to further LNG investment in the country.

Santos’ current investment in the PNG LNG project is set to start producing returns from next year and will be the first big project to kick-start the company’s growing cashflows. When that happens, Santos CEO David Knox has said the company will consider its dividend policy for shareholders. In August Mr. Knox told The Australian, “We’ve said we’re going to consider growth and rewarding shareholders who have comes with us on this journey.”

It has been a solid 12 months for Santos and the company’s share price has reflected this, up 30% over the last year from $11.65 to $14.96 compared to a 19% rise in the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO).

Foolish takeaway

Expanding further in PNG is a smart move by Santos, allowing the company to capitalise on its existing investment and take advantage of the government’s desire for increased investment — so shareholders can keep on grinning.

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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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