Since touching a multi-year low of $6.92 in early April, the share price of leading oil and gas producer Santos Ltd (ASX: STO) has rallied to $9.03 thereby providing savvy investors who picked the bottom with gains of around 30%.
In terms of picking short-term winners – Santos has definitely been the right play with the stock far outperforming the return from peers Woodside Petroleum Limited (ASX: WPL) and Oil Search Limited (ASX: OSH) in the past month.
For those who didn't jump on board at the depths of the oil price crash, it is of course painful to miss out on such fast gains, however with Santos' stock still down around 36% over the past 12 months there could potentially be plenty more upside left.
Here are 4 reasons to be bullish:
- The price of Brent oil is currently trading at over US$67.50 which is a far cry from the doomsayers' predictions that the commodity was set to tumble below US$40. This is particularly important with regards to Santos given the company's all-important GLNG Project is forecast to provide positive free cash flow at US$40 per barrel of oil.
- Liquefied Natural Gas (LNG) – The group is aiming to leverage existing and new LNG infrastructure and capabilities. With the group's Gladstone LNG Project (GLNG) nearly 95% complete it appears likely that the asset will begin producing towards the last quarter of 2015 and come online within the US$18.5 billion budget which will provide a massive boost to the company's cash flow.
- Santos is focused on both increasing production rates and also reducing capital expenditure. In the first quarter of 2015 the group managed to boost oil equivalent production by 15% compared with the prior corresponding period (pcp) while also slashing capital expenditure by 40% from $944 million to $566 million over the pcp. The result was a 12% drop in the production cost per barrel to $14.10.
- Asian expansion – Santos is aiming to build a focused, high value position in South-East Asia. Already the region accounts for 27% of Santos' 2014 production with operations spanning Bangladesh, Indonesia, Vietnam, Malaysia and Papua New Guinea. With forecasts that the world will require a 50% increase in energy needs by 2030, with much of this growth coming from Asia, extending its reach in this region makes strategic sense.
Buy, Hold, or Sell?
Santos achieved a 6% increase in underlying profit to $533 million in 2014 and shareholders received a 17% jump in the full year dividend to 35 cents per share – those figures were certainly headed in the right direction, however, it's hard to know what to expect in 2015!
Navigating a lower average oil price won't be easy for Santos, however, management appears focused on repositioning the group to operate in a tougher pricing environment which could lead to the market being surprised on the upside. Buying at current levels isn't for the faint-hearted but in the long-run it could still turn out to be a savvy move.
