Santos or Woodside? What if you had to pick just one for your portfolio?

Santos (ASX: STO) or Woodside (ASX: WDS)? It’s one of the oldest questions Aussie investors have attempted to answer. Of course, many own both, but if you had to choose, which one would you pick?

Well, luckily for you, we asked this exact question to Michael Slack, Head of Research at global active equity specialist Martin Currie. We’ll get to his views in a second, but first, here’s a high-level snapshot of each company’s first half results.

Santos H1 FY24

Revenue: +9% to US$2.78 billion vs consensus US$2.88 billion

EBITDA: -12% to US$1.81 billion vs consensus US$1.87 billion

Interim dividend: +49% to US$0.13/share (unfranked, ex-date: 27-Aug) vs consensus US$0.13/share

Unit production costs: +4.3% to US$7.94/boe

FY24 Guidance (unchanged):

• Production: 84-90 mmboe
• Capex: ~$1.25B plus major projects capex ~$1.6B
• Unit production costs: $7.45-7.95/boe

Woodside Energy H1 FY24

Revenue: -19% to US$5.99 billion vs consensus US$5.97 billion

EBITDA: -11% to US$4.37 billion (underlying) vs consensus US$4.23 billion

Interim dividend: -14% to US$0.69/share (fully franked, ex-date: 9-Sep) vs consensus US$0.51/share

Unit production costs: -5.7% to US$8.30/boe

FY Guidance (unchanged):

• Production: 185-195 mmboe
• Capex: $5.0-5.5B

Interview with Michael Slack, Head of Research at Martin Currie

In one sentence, what were the key takeaways from these results?

Santos’ showed a slight miss on its top line earnings due to an increase in production costs, but its dividend was in line with expectations. Woodside’s results were largely in-line with consensus, mainly because the company had flagged each line item a couple of weeks ago. Woodside’s US$0.69/share dividend was surprisingly strong, however, as management chose to maintain the existing 80% payout ratio. The market was looking for them to reduce this ratio given the amount of capex the company has ahead of it.

Were there any major surprises in these results that you think investors should be aware of?

Certainly, the Woodside dividend was a surprise, the market was expecting around US$0.51/share and we got US$0.69/share. Progress on the ramp up of their Sangomar project in Senegal was also ahead of schedule, with the maximum capacity of 100,000 barrels per day achieved in the first two months of operation. That’s very quick, and it’s a great start for that project. It’s still early days though, management isn't getting too carried away in terms of what sustainable production and reserves looks like, but that's very encouraging for them.

Would you buy, hold or sell either of these stocks on the back of these results, and if you had to pick one over the other, which would it be?

Santos: BUY | Woodside Energy: NEUTRAL

First of all, we take a much longer term view than just these results. With that in mind, we prefer Santos over Woodside primarily because of it’s superior growth outlook. Woodside’s capex is predominantly being used to sustain production levels, that is, as production at its mature projects decline, they’re really only matching that loss from their newer projects.

Santos on the other hand, has a clear path to growth through their current and investment projects. We don’t think the market is paying for that strong production profile.

It’s not that Woodside is poor value around the current share price, it’s not, simply that we think that Santos has the better long term earnings growth potential of the two.

What’s your outlook on the sector over the year ahead? Are there any risks to this sector that investors should be aware of?

We think the outlook for the energy sector is positive, particularly for gas rich, East coast Australia exposed companies like Santos. We see domestic gas price in Eastern Australia moving higher on supply shortages and see little downside to regional LNG prices from current levels. The oil price outlook is more balanced with the conflicting risks of potential global economic slowdown to the downside and geopolitical disruption to the upside.

From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now?

Rating = 4

I would go a 4. We’re not seeing a great deal of value around at the moment. In terms of sectors I feel are expensive, the banks would be on top of my list. They’ve run too hard lately and they weren’t exactly cheap before they ran.

We’re also concerned about some of the valuations in the consumer discretionary sector. If you look at a company like JB HiFi, it delivered a result that we think is at odds with the pain that is currently being felt in the consumer space, and we expect some of this pain is going to flow through in the near future.

As for cheap sectors, the energy sector, coincidentally. We think it is undervalued. We also think that there are parts of the resources sector that look cheap. Battery metals has been a massive underperformer and prices there are beginning to look attractive. To be honest, there’s not much more out there looking very cheap.

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