Santos Ltd (ASX: STO) needs no introduction but deserves to be in your portfolio. It has a market capitalisation of $13.6 billion, making it Australia's third-biggest pure oil and gas play, after Woodside Petroleum Limited (ASX: WPL) and Oil Search Limited (ASX: OSH).
In the past couple of years investors have balked at Santos' shares due to its seemingly lofty valuation (it currently trades on a P/E of 25!). However looks can be deceiving.
With a little bit of investigating, it's easy to see why it trades on such high multiples and why it could be expected to climb even higher in the future. With the huge GLNG project due for completion in 2015 and the PNG LNG project already online, earnings per share are expected to nearly double in the next two years, while cash flows will increase by more than 100%.
In the 2013 annual report chairman Ken Borda reaffirmed management's predisposition to reward shareholders saying: "We are focused on rewarding shareholders as we strike a balance between higher dividends, debt repayment and ongoing investment for growth."
Santos has operations in all mainland Australian states and the Northern Territory and also in Indonesia, Vietnam and Papua New Guinea. It is strategically placing itself to tap into the massive energy deficit expected to plague Asian countries in coming decades. And it's not alone.
British Petroleum believes the gas deficit in Asia could be expected to reach more than 400 mtpa by 2030, providing an opportunity for guaranteed sales and higher prices.
Santos' strategy is to produce 80 to 90 million barrels of oil equivalent per year by 2020. Management remains confident the company will achieve its goal, particularly with the addition of both PNG LNG and GLNG projects, which have the capacity to produce 6.9mtpa and 7.8mtpa of LNG, respectively.
Bottom Line
With healthy balance sheets and ongoing production growth, Santos deserves its current price tag and could represent value for shareholders willing to hold it for the long term, particularly if management decide to return excess capital in the form of a dividend. Based on forecast earnings of 102.3 cents per share for 2015, it trades on a P/E ratio of 13.7 and a forecast dividend yield of 3.4%. With energy prices going up, it's hard to think it'll get any cheaper!
