Santos has record quarter, is it time to buy?

Oil and gas producer Santos (ASX: STO) has popped up on many investors’ radar after the release of its stellar third-quarter results. But how do the results really break down and does it mean it’s time to buy Santos?

Santos presented a record result for sales revenue for the quarter of just over $1 billion, up 20% on the same period in 2012 and a solid result given the 1% drop in production and 7% lower sales.

On the surface, this is a pleasing result. The jump in sales revenue appears to be the result of higher prices for natural gas and LNG for the quarter over the prior year, reported in Aussie dollars.

However, although not explicitly stated, the real key to the result was the lower Aussie dollar for the quarter, which acted as the rocket fuel behind the higher prices. For example, the average crude oil price received year-on-year was flat at US$116 per barrel, but when converted to Aussie dollars that number jumped from $112 to $127 per barrel, a 13% increase.

It’s a similar story with the average LPG price received. In USD, the price for LPG was up 3% on last year, but the lower Aussie dollar helped Santos to achieve a 17% jump once converted, from $809 per tonne in Q3 2012 to $945 this year.

The Aussie dollar has been on the rise again over the last month and for this very reason it is important to dig around in a company’s reported numbers and separate out the real source of growth.

Still, the sales figure are positive given that the company has not yet started production from its two big LNG projects, which are set to massively increase production, and it shows the power a favourable exchange rate can have.

Foolish takeaway

Santos’s share price has fallen back slightly from the $15.50 per share it hit in September, but is still up 32% for the year versus the S&P/ASX 200 Index’s (Index: ^AXJO) (ASX: XJO) rise of 13%.

The current price does not leave much margin for safety if things go wrong, however with Santos forecasting a 6% per annum compounded growth rate to 2020, any weakness could be an opportunity to buy for long-term investors.

Santos is expected to significantly grow its dividend over the next three years, but for The Motley Fool’s favourite income idea for 2013-2014 grab our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.

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

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