Oil and gas producer Santos Limited (ASX: STO) could be on its way to nearly double net profit after tax (NPAT) from $504 million in 2013, to almost $1 billion by the end of financial year 2015, according to some analyst estimates.
And investors stand to reap the benefits with Santos’ board vowing to increase distributions to shareholders as the substantial cash flows rise.
But if Santos is to hit the billion-dollar profit mark there are a number of barriers it will have to cross first.
First and foremost, Santos will need to successfully complete construction of its two major projects which are to be the source of the growth. These are PNG LNG, which Santos is completing with partner Oil Search Limited (ASX: OSH) and Queensland’s GLNG.
Last week Santos revealed that PNG LNG is ahead of schedule and over 95% complete, while GLNG is also on track and on budget at 80% complete, with first LNG delivery still forecast for next year.
The completed projects will both catapult sales revenue and curb capital expenditure. By 2016 Santos’ annual energy production is expected to grow to over 70 million barrels of oil equivalent (mmobe) from full year 2013 production of 51 mmobe.
The other requirement will be for continued growth in the price of oil and gas. This should be no problem for domestic gas supply, but less certain is the price for international LNG which Santos is banking on for its new projects.
Should you buy? Given the large growth prospects over the medium term, at the current price Santos certainly looks attractive. If profit can double to $1 billion, the current price to earnings ratio of 25 would effectively halve and be less than Australia’s other major energy producer Woodside Petroleum Limited’s (ASX: WPL) current p/e ratio of 16.
Add the fact that Santos has one of the cheapest pools of energy reserves of ASX-listed energy producers and you have a winning combination.
At its current share price Santos offers a solid growth opportunity and growing dividend at relatively low short-term risk.
If profit is to double by 2016 investors should keep an eye on total production growth, continued reduction to capital expenditure, and a steady rise in the average realised price received for oil and gas.
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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.