Will 2015 be a better year for Santos Ltd?

Santos Ltd (ASX:STO) is set to finish 2014 on a low but that could set the stock up for a rebound in 2015.

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It's shaping up to be a horror year for investors in one of Australia's largest oil and gas producers Santos Ltd (ASX: STO), with the share price suffering a fall of 43% so far this calendar year.

Amazingly, it was a completely different scenario until as recently as September, when the stock hit a new 52-week high of $15.32. Now in a dramatic change of events the stock looks set to finish 2014 below $9!

The driver of the decline is the sinking oil price which is now at a five-year low.

A tale of two halves

Santos (which operates on a December financial year) reported pleasing results in the first half to June 2014. Sales revenue grew 25% to $1.9 billion as the group benefitted from the start-up of the PNG LNG project in April. The group also enjoyed the benefit of higher oil and gas prices.

Underlying profit was also slightly higher while the interim dividend was increased by a substantial 33% to 20 cents per share fully franked. The board also commented that they plan to maintain or increase the dividend as earnings and cash flow increase, with an expectation that the dividend will be reviewed around the time of GLNG start-up.

The second half will obviously have its challenges with the decline in oil prices reducing revenues and profit margins and placing a cloud over the profitability of Santos' LNG projects which are struck on oil-linked margins.

Cautious optimism

Despite the current volatility in the oil price, there are reasons to be positive about the medium-term outlook for Santos. Firstly there is the start-up of the GLNG project which is currently over 85% complete and on track for first production in 2015. Then there is the group's exploration program which has resulted in the exciting discovery of Lasseter-1 in the Browse Basin off Western Australia. Finally, the slashing of the company's market capitalisation in response to the sinking oil price may well have been overdone and created an opportunity for value investors to buy the stock while it is out-of-favour and undervalued.

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned.

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