Santos disappointment unlikely to dampen enthusiasm

Punters were hoping for strong June quarter production numbers. They didn't get them but Santos remains the favourite energy stock.

Oil giant Woodside may have changed the game for big resources outfits back in April when it decided to direct more cash back to shareholders, but the real favourite among energy companies is Santos.

Overlooked and under loved for decades when its ownership was restricted by South Australian government laws, the company has reinvented itself since throwing off the shareholding shackles.

It second quarter production numbers this morning, however, have provided some disappointments.

After a weak March quarter, analysts expected a much stronger June quarter for it to achieve its guidance of 53 million and 57 million barrels for the year.

Instead, Santos has downgraded its full-year production slightly to between 52 million and 55 million barrels after a 5% decline in output for the June quarter to 12.4 million barrels. Revenue, however, was up 8% to $797 million.

Santos has found itself in a sweet spot because of its three tiered production profile: a unique mix of high-volume traditional sources, the imminent development of new territory about to come on stream and high prospective exploration areas.

Its traditional gas production area in the Cooper Basin has been upgraded due to new improved extraction techniques and a recent joint venture with Drillsearch to lift output.

It also has enormous growth potential with its massive LNG project in Queensland and PNG and it has hit pay dirt as a 25% owner of a potential new gas field in the Carnarvon Basin off the West Australian coast (see Tim Treadgold's Santos fires up on LNG).

A lower Australian dollar also is expected to favourably impact the company. But most of the love for Santos relates to its Queensland LNG development.  The project, now 60% complete, is running ahead of schedule with production likely to come on stream earlier than the scheduled mid 2015.

In addition, its PNG gas project should deliver a strong boost to cash flow next year, which will significantly alter the company’s financial dynamics.

Oil prices were up 1.5% overnight, which could help to overcome the disappointment from the production report.