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Santos Ltd and Origin Energy Limited : Should you buy?

The energy industry is about to open up wide over the next two years. There has been talk in the media that Australian LNG producers may not be able to compete with foreign producers like Russia and the U.S. on cost.

However, analysts at Morgan Stanley are suggesting that three Queensland LNG projects currently under construction are possibly being undervalued. The analysts are looking over a 20-30 year period at the potential cash flows, which includes a possible doubling of gas prices in a bull case scenario.

Those investors who don’t regularly follow the oil and gas stocks may be familiar with the individual names, but what do they have to offer as investments?

—   Santos Ltd (ASX: STO)

Santos has the advantage of having two big projects starting up within the next year. One has already commenced- the PNG LNG project. The company holds a 13.5% stake in it and the first LNG shipments headed out to Japan in May.

The other project is the GLNG project in Queensland, which is expected to have first shipments in 2015. Santos is working with other energy companies like Beach Energy Limited (ASX: BPT) and Senex Energy Ltd (ASX: SXY) in the Cooper Basin to develop oil and gas supplies for the GLNG.

The company said it will be a time of “transformational growth” and earnings are forecast to rise in a step-like move to a higher level. The market may be anticipating that change, but long-term investors should be positioning for the potential expansion over the next 5-10 years. This is one stock that should be in your portfolio.

— Origin Energy Limited (ASX: ORG)

The energy producer and gas and electricity retail service provider will also be looking forward to big changes when its Australia Pacific LNG (APLNG) project comes online and begins shipments in mid-2015. Forecasts are for earnings per share to almost double over the next two years as it gets ready for an expected step-change up in profits.

It is developing unconventional gas sources in its Queensland project and also has teamed up with Beach Energy, Senex Energy and Drillsearch as well to help supply its gas needs once the APLNG is running at full capacity. Origin has also bought into Woodside Petroleum’s Browse basin LNG project to keep its growth momentum up.

This stock is also one that would help your portfolio with potentially higher dividend payments coming from the forecast earnings increases.

However, for good diversification, it may be better to have only one big energy stock right now. The simpler energy play is Santos.

Origin has its gas and electricity utility business to focus on also. It’s a good business, but Santos can concentrate its cash flow into oil development and production, especially more in overseas projects where cheaper costs help earnings margins.

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