Santos' cash pipeline

Woodside Petroleum has been the oil and gas company making news over the past three months, including today’s half-year profit report of $US873 million, a 7.5% increase on the previous corresponding half.

But arch-rival Santos has been making more money for investors, and should continue outperforming for the next 12-months.

The difference between the two is mainly one of timing and asset maturity, and while both deserve a buy rating because of their exposure to the world’s hottest energy commodity, LNG, Santos is poised to benefit from the cash rush of new projects.

First explanation of the value gap opening between Woodside and Santos was carried in the June 12 edition of Eureka Report, “Santos fires up on LNG”.

Back then it was highlighted that Woodside shares, even with the benefit of a special dividend in April, had risen by just 4.4% between January and early June. Santos, which is in the middle of a hectic project development phase, had risen by 13.5%.

The trend has continued. Since June 12 Santos has risen by another 15.3%, while Woodside has gained 3.3%, taking their respective share-price increases this year to 28.8% and 7.7% respectively.

More of the same can be expected, with Santos tipped by several leading investment banks to continue rising from its current price of around $14.69 to as high as $17.97 (Citi), $17.60 (Goldman Sachs) or $17 (Macquarie) – a potential increase, according to analysts, of between 15.7% and 22%.

Essentially, Santos is where Woodside was a few years ago, in the final stages of building a series of oil and gas projects, with the combination promising to significantly boost profits which will, in turn, encourage management to significantly boost returns to shareholders.

The promise of a cash-rich future is driving Santos, which is a part-owner of two new LNG developments, along with rising conventional oil and gas production. There is also the promise of significant flows of unconventional oil and gas from thick beds of previously ignored beds of shale in the company’s heartland, South Australia’s Cooper Basin.

Woodside, on the other hand, has a less exciting project development profile having already achieved much at its flagship, the North-West Shelf, and the associated Pluto LNG project. It has been generous in rewarding shareholders this year but has few immediate development options.

The big news about Woodside, apart from today’s profit announcement, includes a decision to opt for a floating LNG solution at its troubled Browse project in WA’s north, and possible involvement in an LNG project in Israel, meaning it has shifted from being a growth stock into a form of oily annuity.

Santos is at a different stage of development, having emerged from its own period as a low-growth stock when its share register was controlled by the South Australian Government, into a growth-focussed company with multiple new income streams emerging.

Last Friday’s profit statement for the half-year to June 30 from Santos provided a glimpse into how investors are looking forward to the new projects, and not backwards at a result which will soon become a footnote in history.

Despite a 4% fall in the volume of oil and gas production in the latest half-year, and an 11% fall in underlying profit to $251 million, the company’s share price rose by 3.4% on the day, and continued rising this week, hitting a 12-month high of $14.82 on Monday.

Investors were mildly interested in the profit and welcomed the 15 cents a share interim dividend, but they were more interested in comments by Santos chief executive, David Knox, who repeated previous suggestions that as cash flow starts at the PNG and Gladstone LNG projects shareholders could be in for a big payday.

“These LNG projects are poised to deliver significant shareholder value and it is our intent to review capital management options as we approach PNG LNG production,” Knox said.

Those capital options could include higher dividends, share buy-backs, or both.

In his half-year comments, Knox highlighted a 5% reduction in production costs, record revenue thanks to higher oil and gas prices, and the fact that all development projects were on schedule and holding their latest capital cost estimates after earlier cost blow-outs.

PNG LNG (13.5% Santos and operated by ExxonMobil) is 90% complete, with commissioning gas scheduled to be introduced into the circuit in the next few weeks and with first LNG scheduled for early next year.

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