3 reasons to be bullish on Santos Limited

Investors should demand a margin of safety when investing in commodity businesses.

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The share price of Santos Limited (ASX: STO) has barely moved this calendar year, having recorded a small fall of 2.5%. At $14.26 the share price doesn’t look like a screaming bargain however if it gets a little cheaper it could be a great opportunity to add the oil and gas producer to your portfolio.

There are at least 3 reasons to be bullish on buying Santos at the right price.

Firstly, Santos is on the cusp of delivering the transformational GLNG and PNG LNG projects which will lead to a step-change in revenues for the firm. These projects have been years in the planning and development and are expected to produce around 3 million tonnes per annum of LNG once they reach full production. To put that increase in perspective – Santos currently produces only 300,000 tonnes of LNG from its Darwin facility per annum. Talk about a step change!

Secondly, Santos is positioned to supply Australia’s growing population. As one of Australia’s largest producers of gas for the domestic market and with the largest exploration and production acreage, the group is positioned to remain a leading force in providing energy to the nation.

Thirdly, management is positioning Santos for Asian growth through an exploration-led portfolio in Indonesia, Vietnam and Papua New Guinea. Already 16% of Santos’ total production is sourced from its Asian operations and this is set to expand significantly once PNG LNG and 2 other assets come on line during 2014. With around 75% of the demand for new energy emanating from Asia, it is clearly a growth market.

Santos is not alone in its quest to supply LNG to Asia. Oil Search Limited (ASX: OSH) and Origin Energy Limited (ASX: ORG) have also aggressively moved in to this space too. The increased supply of LNG has the potential to weaken global prices which is an unknown but a real possibility and this is why investors should demand a margin of safety in their purchase price.

Motley Fool contributor Tim McArthur owns shares in Origin Energy Limited.

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