3 things every investor must know before buying Santos Ltd

Santos Ltd (ASX: STO) is one of the largest ASX listed energy producers and is on track to significantly grow production as well as its dividend over the next three years. This could make the company a top pick with investors going forward.

Not all energy companies are alike however, so here are three things every investor must know before buying Santos:

1. Short-term boom

The boom in production and revenue for Santos is just beginning. Second quarter production was up 3% over the same period in 2013, while sales revenue jumped 22%. Full year 2014 guidance (to 31 December 2014) is for an increase in production of up to 11.8%.

The two big drivers of Santos’ growth are the PNG LNG project and Queensland’s GLNG project. PNG LNG, which is being undertaken with Oil Search Limited (ASX: OSH), has commenced operations while GLNG is due deliver its first LNG in 2015.

2. Rising future energy prices

Despite the recent fall back in the immediate spot–price for oil, Reuters reports that the price of oil futures is actually rising as a result of geopolitical tensions, largely because of sanctions taken against Russia which apply to the sale and supply of drilling equipment to the country.

Only 25% of Santos’ production is as liquids, but some of the pricing for LNG is derived from the price of oil. The remaining 75% is as gas, but rising demand from the Asia Pacific and increasing prices for east-coast gas contracts will drive strong earnings growth.

3. Long-term options

Investors often avoid energy producers because of questions over long-term growth prospects, but Santos has several low-risk options going forward.

Firstly, the company can leverage its established projects for expansion including PNG LNG and Darwin LNG. These are logical steps as the additional costs are likely to be relatively modest.

Santos also plans to continue progress with its Bonaparte LNG joint venture. In June the project shelved a floating production option, but said it would consider a pipeline option which has a final investment decision scheduled for 2015.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.

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