Should you buy these 2 oil and gas stocks?

New projects coming online should provide an earnings boost.

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These two companies have great earnings growth prospects as their respective LNG projects come online in the next year. They also have the opportunity to sell to the energy-hungry Asian markets in the future.

Oil Search Limited (ASX: OSH) explores, develops and produces oil and gas in PNG. It has a 29% interest in the PNG LNG project being operated by ExxonMobil. The project is 95% complete now, and first shipments of LNG are expected to go out in the September quarter this year.

Also, it has just bought into another project that Canadian company InterOil has in its Elk and Antelope oil discovery areas, paying US$900 million for a 22.8% stake in what is considered to be the largest undeveloped source of gas in PNG. Oil Search has been in PNG for decades, so this move will allow InterOil to draw upon its regional experience.

Over the past four or five years the share price has steadily climbed from about $4 to $8.65. As the PNG LNG project is almost ready to produce, the stock’s PE stands at 50 with a lot of production earnings being priced in.

Origin Energy Limited (ASX: ORG) is an integrated energy company involved in oil and gas production, power generation, and retail energy sales. It’s also in the middle of a project called the Australia Pacific LNG project (APLNG), with gas field development in the Bowen and Surat basins in Queensland that will deliver gas to its Curtis Island LNG processing plant near Gladstone.

It is anticipated that first shipments for export will occur in mid-2015 and by late 2015 both LNG processing plants (“trains”) will be operational.

Looking at the company’s underlying net profit, since 2009 earnings have risen by a compounded annual average of 9.4% with 2012 being just short of $1 billion and 2013 resulting in $843 million. It has more stable earnings growth than Oil Search, yet has low returns on equity and net profit margins of 5.72% and 5.2% respectively, so it is more of a capital intensive commodity business.

It has a PE of 21, less than the 26 PE of Santos Limited (ASX: STO). Santos is another well-known energy producer developing its own gas for LNG exportation from facilities being built separately on Curtis Island.

Foolish takeaway

As a long-term investor I would be more attracted to Origin Energy because of its domestic infrastructure and position as an energy retailer. There is more predictability in future earnings from past history, though low ROE and net profits mean it will have to grow quickly to generate good profits and returns for investors.

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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