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Why the Santos Ltd share price is printing 52-week highs

Since July last year Santos Ltd (ASX: STO) has doubled its share price to $6 at the close of the market yesterday, up 62% in a year and at a three-year high. Santos is also under a $13.5 billion takeover bid (see The Fool) from Harbour Energy, a US private equity firm.

Santos chief executive Kevin Gallagher was reported in The Sydney Morning Herald yesterday to attribute the rise in the share price to the company’s turnaround over the past two years, as well as the recent takeover offer.

After not paying dividends for over two years Santos may be able to commence paying dividends in the future as it reaches its 2019 debt target almost a year ahead of schedule.

According to a report released by the company to the ASX yesterday, after cutting its debt by about 8% in the March quarter and nearly half since the start of 2016, net debt is sitting at around US$2.5 billion ($3.2 billion).

The 2019 target is US$2 billion. Cashflow has turned around from being negative in 2015 to over a positive US$2 millon a day.

Definitely not a yield play yet, but the future is looking brighter for Santos provided the oil price stays put, although a fall in the oil price later this year is forecast by Barclays as reported in The Fool.

Reduced production at PNG LNG has been offset by a 25% rise in the average oil price in the last year. The new offer by Harbour Energy is $0.50c above the closing price yesterday.

Despite Santos advising against accepting the offer the board may be tempted. Shareholders should hold shares until further guidance from the company.

Woodside Petroleum Limited (ASX: WPL) is in the same sector as Santos and is up 6.8% in the last six months helped by the stronger oil price but has fallen 3.98% in the last year to close at $31.06 yesterday. Unlike Santos, Woodside is paying a dividend of 4.05%, which is fully franked. Trading on a PE ratio of over 19 does make it starting to look fully priced.

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Motley Fool contributor Rosemary Steinfort has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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