The Motley Fool

3 reasons Santos is a long-term play

Last month oil and gas producer Santos (ASX: STO) announced record sales revenues for the first half of 2013 at $1.51 billion. It was a strong result and will only get stronger as production ramps up in the coming years. Here are three reasons Santos is set to keep on delivering.

International growth

The massive PNG LNG project that Santos has a 13.5% stake in is over 90% complete and set for first production next year. The project is being operated by joint venture partner Oil Search (ASX: OSH) and adds to Santos’ sizeable reserves of 1.406 billion barrels of oil equivalent.

Big projects like PNG LNG and the Queensland-based GLNG project have required significant investment from the company over the last five years, but have long life spans and capacity to grow over time as demand and energy prices dictate. This will mean cash flows keep up well into the future.

Santos’ international portfolio spreads throughout Southeast Asia, covering Vietnam, Indonesia and Bangladesh, which adds diversification and spreads risk.

Domestic growth

Domestic growth, both in terms of growing demand for gas and Santos’ ability to supply the growing market, are strengths that the company will be able to capitalize on over the next five years.

As contracts to supply gas to New South Wales come up for renewal in the next three years, fears are that limited supply will result in a large price spike. Santos has been increasing its investment in the Cooper/Eromanga basin, which has the ability to supply domestic demand and recently announced a partnership with Drillsearch (ASX: DLS) to purchase oil and gas production.

Dividends

As cash flows from major projects come online, higher dividends will likely start flowing through to investors. We have seen this with Woodside Petroleum (ASX: WPL) paying special dividends and increasing its payout ratio.

Santos offers a generous dividend reinvestment plan, which is a great way for long term investors to maximise the benefits of compounding returns without brokerage fees, often at a discount to the share price.

Foolish takeaway

The good performance is set to continue from Santos which offers a diversified portfolio and growing cashflows – perfect characteristics for a company to hold over the long term.

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Motley Fool contributor Regan Pearson does not own shares in any company mentioned.

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