Baron Rothschild once said, "buy when there's blood in the street" – for those following Santos Ltd (ASX: STO), the blood is clearly flowing.

Last year, with oil prices above US$100, Santos was riding high. Since then, hit by falling oil prices, dividend cuts and a dilutive capital raising the stock price has collapsed. But look through the noise, and there is a great opportunity.

First, and most obviously is that the share price is well below the theoretical ex-rights (TERP) price of $5.15. Even with the placement, which was done at a premium, to be 20% below the TERP and only a small amount above the rights price of $3.85 (after briefly dripping below it) this appears to be a kneejerk reaction.

Also consider that the rights issue (while arguably much later than it should have been) has also alleviated any medium term funding concerns, with the next major debt maturity not till 2019.

Secondly, it is worth considering the c.$6.5bn value that the Woodside Petroleum Limited (ASX: WPL) bid for Oil Search Limited (ASX: OSH) implies for the value of Santos' stake in PNG LNG – their crown jewel asset.

Compare this with Santos' current market cap of just $7.6bn. There are also market rumours of an increased bid from Woodside. With Santos' capex cycle having peaked following the start of shipping from the previously troubled GLNG project, this appears to undervalue the remaining assets within Santos.

Short-term oil prices continue to be a drag, but think long term

Santos recently spurned a $6.88 per share bid from a Middle Eastern consortium (equivalent to approximately $6 post rights issue). These investors are able to take a longer term view and look through the cycle, and consequently I wouldn't be surprised to see this consortium come back again given the current weakness in share price – albeit this would be unlikely to occur prior to the completion of the retail shortfall bookbuild component of the rights issue on 3 December.

Obviously the major drag on the stock has been the oil price. There has been a global glut in oil through high OPEC production (with Saudi production at record levels, and OPEC production near record levels), coupled with growth in North American unconventional (predominantly shale and oil sands) production at record levels. This has come at a time when we have seen demand growth from emerging markets starting to slow.

But it is worth stopping and looking at the underlying trends. The IEA has said that the current OPEC strategy of promoting market share over price could keep oil below $50 to 2020 – basically saying the oil price depends mostly on OPEC.

One would ordinarily expect cartel behaviour to lead to profit maximisation – so what is going on? Most obviously, OPEC is trying to crowd out higher cost producers; predominantly in North America. It has been effective, with rig counts (rigs in use drilling new wells) dropping to their lowest level since May 1995; albeit it will take time for this to flow through to total production.

Personally, I also think that the cashed-up Saudis are keeping prices low to weaken regional rival Iran as sanctions are lifted. Longer term a sustained lower oil price will help to fuel activity while keeping inflation in check. Also, as OPEC crows out other production, it makes sense for them to allow prices to start to rise again, and OPEC has said it expects the supply/demand balance to be restored next year.

Most oil companies think in decades rather than months, if you can wear the short-term noise, there is a clear longer-term opportunity.

The post Why I think Santos Ltd is a buy at today's share price  appeared first on The Motley Fool Australia.

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Transurban Group (ASX: TCL) is probably the best listed toll road portfolio in the world. The market is already aware of Transurban's solid and growing dividend profile – you currently get a 4.4% yield which is expected to grow at double-digit levels over the next two years with significant potential beyond that.

Quality Earnings Growth

It is however, worth looking through the headline numbers to fully appreciate the quality of the growth. Three of its major roads which represent over 55% of revenue and 77% of EBITDA have minimum toll increases above the rate of inflation (4.5% for Citylink and 4.1% for M1 & M2), while the other Australian roads provide a minimum of CPI.

This means that all else equal, revenue and EBITDA should grow well above inflation. But all else isn't equal – through leveraging their position in the Sydney and Melbourne markets, they have been able to negotiate greater increases in truck tolls on four of their roads, including their largest, as compensation for works done.

Further, the work being done is largely to increase the capacity of the network – construction of the Northconnex in Sydney and widenings on Citylink and the M5 which should also lead to traffic growth.

Unappreciated Option Value

All this is known, and if you believe markets are efficient, mostly priced in. Where I think the market is getting it wrong, is it is failing to properly appreciate the option value inherent in the roads.

Management is highly capable, and has shown itself adept at leveraging the position of its existing road network to put together deals that no-one else could do – such as funding Northconnex though concession extensions and truck toll increases on other roads they own (M7, M2 and LCT).

They are likely to look to do something similar on the Western Distributor project in Melbourne; and there will be ample opportunities in Sydney with the Westconnex as parts of that project come to market over the next few years.

They are also in the box seat for the Brisbane Airport Link bid, being the only party who could effectively integrate the road with their Queensland network, saving on back office and potentially maintenance costs.

Transurban also owns two roads in the US that are often ignored. They shouldn't be. While the current contribution is small (less than 1% of EBITDA last year) the US roads have significant potential to become meaningful over time. Both roads have long concessions which run till 2087 and both work on dynamic pricing – that is the toll goes up as traffic increases and falls as traffic decreases.

Open your Google Earth and have a look at these roads (I95 and I495 express lanes) on a map. They run through some of the richest counties in the US, and feed traffic into and around the Washington DC area. While initial traffic was weaker than expected, road space is a limited resource. With growing populations, as competing roads become more congested, demand and toll revenue should increase handsomely in the medium to longer term.

So what are the risks?

The two key risks are poor acquisitions and rising interest rates. In my view, in the short term, both of these are relatively limited. The CEO Scott Charlton has shown considerable discipline so far in acquisitions, and seems focused on existing markets and on doing deals, the Queensland Motorways acquisition aside, where they can bring something to the table that no one else has. This avoids a price shootout, and defrays much of the risk by seeking compensation on other parts of the network.

While a significant rise in real interest rates is a risk to the valuation, a soft Australian economy and continued weakness in the mining sector make this unlikely in the near term, with most people expecting interest rates to fall.

Foolish takeaway 

With low risk growth, option value and a good and growing dividend yield, Transurban is one stock that investors with a long horizon can buy and hold for the long term. 

The post Why you should buy Transurban Group for dividends and growth appeared first on The Motley Fool Australia.

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