Santos forecasts 6% annual production growth to 2020

With a number of significant, large-scale projects on the go at the moment, many investors have already cottoned on to the fact that the future earning potential for oil and gas producer Santos (ASX: STO) is strong.

This has been evident by the outstanding share price rise of 38% since the start of this year, compared to 12.8% for the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO).

Last week in a presentation by Santos CFO Andrew Seaton to the 2013 CLSA Investors’ Forum in Hong Kong, Santos revealed just how much all that growth is expected to equate to. The magic number according to Santos is 6%. That is the compounded annual growth (CAGR) in production the company expects to see between 2011 and 2020.

Significant contributors to this growth are local LNG projects including the GLNG joint venture project, Darwin LNG and the proposed Bonaparte LNG project, as well as international projects focusing on Indonesia, Vietnam and Papua New Guinea.

Because there can be so many unknowns in business, it’s uncommon for investors to be given long-term production forecasts, even if such forecasts exist within the company. However the nature of the project planning process, which involves having clear reserve estimates, enables Santos to forecast the production output each year to a reasonable degree of accuracy.

So is Santos a worthy addition to your portfolio? At its current price Santos is certainly no bargain, especially after the great run the share price has had over the last year, and the market is certainly anticipating solid future growth.

This could become a problem if Santos is unable to deliver on expected growth for any reason, but this is a risk that will decline for investors with a long time horizon and the ability to ride out any share price dips.

Foolish takeaway

Santos’ forecast production growth gives investors a good idea of what to expect from the company in the coming years. In addition investors can expect to see growth in the company’s dividend as production ramps up and cash flows rise.

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

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