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2 Energy Stocks With Plenty of Gas Left in the Tank

These two Australian energy companies should see strong returns over the next decade.

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Mathew Hodge: I'm here today to talk about Woodside Petroleum and Santos. My fellow analyst, Mark Taylor, recently completed a special report on energy stocks, and we've highlighted two names that we really like in that space. The key underpinnings [of our special report] are that we see strong demand for gas out of Asia and that Woodside and Santos are favorably located to meet that demand. They are low-cost providers, and they have high margins. We can see their strong returns carrying on for well over a decade, which is underpinning our narrow moat ratings on those stocks.

Also, we see a lot of the concern around increasing supply out of the U.S. as being a temporary issue. We think, in the long run, that gas prices in the U.S. will drift up and make gas out of the U.S. less competitive in the Asian market.

Key attractions from a shareholder point of view: Woodside offers a pretty good dividend at the moment. It's in a phase where it's spitting out cash flow. We were concerned that they were moving offshore and looking at places like Israel; but we're glad that they have refocused at home, and this has increased our confidence in management there.

The interesting thing with Santos is that they have two major projects under construction. PNG [a gas development project in Papua New Guinea] has started producing gas. And they will have gas from Gladstone [a liquefied natural gas project] next year. So, those are two big new projects for Santos. Their capital costs are dropping off, so shareholders should expect dividends to rise quite meaningfully--and earnings as well. That's why we're bullish on those two names.

Mathew Hodge does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.