Why you should buy Santos Limited instead of Woodside Petroleum Limited

Why Santos has more potential than its bigger brother

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Two of Australia’s largest independent oil and gas producers have reported their first quarter results today.

Investors may be weighing up their options and trying to decide which one would be the better investment. This article offers some pointers to help.

Firstly, Woodside Petroleum Limited (ASX: WPL) has reported sales revenue of US$1.7 billion for the March quarter, on sales of 23.2 million barrels of oil equivalent. Revenues were 16% higher than last year’s first quarter, but just 1.6% over the last quarter of 2013.

The oil and gas producer continues to work on plans for the floating LNG concept for its Browse project and remains in discussions with the Israeli government and its partners to resolve a number of issues with its Leviathan project. Sunrise LNG, in the Timor Sea, has been stalled thanks to a dispute with the Timor-Leste government, and it may be many years before it is resolved.

Santos Limited (ASX: STO) reported sales of $913 million on sales of 13.8 million barrels of oil equivalent. Revenues are up 28% over the previous year, but down 14% from the December 2013 quarter. Santos has maintained its guidance for production of between 52 to 57 million barrels of oil equivalent.

The company says the PNG LNG project, in which it holds 13.5%, alongside Oil Search Limited (ASX: OSH), ExxonMobil, Nippon Oil and the PNG state, is over 95% complete, with first production commencing in late March 2013. The Gladstone LNG (GLNG), which Santos owns 30% of and is also the operator, is 80% complete and remains on budget and on track for first LNG in 2015.

Comparing the two, Woodside has a lower growth profile, with much of the company’s hopes resting on Browse, Leviathan and Sunrise LNG projects. The company will need to outlay billions of dollars in capital to get its future projects up and running, and has a longer runway before it sees any cash flows. While the company is paying out a dividend yield of 5% currently, Woodside is likely to have to raise cash to fund those projects in future and the company could ask shareholders to cough up some of those funds.

Santos, on the other hand, has two massive LNG projects coming online within the next 12 months, and production is set to explode. Earnings per share for Santos is expected to jump by around 50% in 2015, and on that basis shares are trading on a prospective P/E ratio of 13.7, compared to Woodside’s 14.7. 

Foolish takeaway

Given Santos’ higher potential growth, a drop in capital expenditure, and lower forecast P/E ratio, it appears to be the better investment at this stage.

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Motley Fool writer/analyst Mike King owns shares in Santos. You can follow Mike on Twitter @TMFKinga

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