Weekly Update: Stock To Watch Oil Search (OSH)


Oil Search ASX OSHOil Search (OSH) explores, develops and produces oil and gas in Papua New Guinea (PNG) and Australia.

OSH’s major producing operations are the Kutubu and Gobe oil fields and the Moran development.

However, much of OSH’s perceived value is in its substantial PNG gas resources, which have been given a boost by partners such as Exxon Mobil investing huge amounts of money in the project.

The company is poised to enter a major new growth phase, driven by its 29% interest in PNG LNG. The gas will be sourced from the Hides, Angore and Juha gas fields, as well as the Kutubu, Agogo, Moran and Gobe Main oil fields.

1H12 results

Although OSH’s 1H12 results showed a 6% fall in net profit to US$107.5 million, much of the fall was attributable to a jump in exploration costs. An interim dividend of US$0.02 a share was declared.

The increase in exploration costs came as OSH seeks more natural gas to underpin an expansion of PNG LNG.

Whilst an increase in costs is generally not desirable, in OSH’s case, the payoff from finding more gas is worth it if this leads to a third LNG train (plant) at PNG.

A positive takeout from the result was a 7% lift in revenue, which occurred amid stronger sales prices and production volumes.

Nearing first PNG LNG production

The PNG LNG project is the big driver of OSH’s share price, as it has the potential to transform the company into a major energy producer.

The project has an expected life of 30 years, a resource estimated at over nine trillion cubic feet of gas and over 200 million barrels of associated liquids.

The project’s two trains will produce close to 6.6 million tons per annum (mtpa), with OSH’s 29% stake yielding approximately 2 mtpa.

There is also the possibility that a third train could operate in the field, which may increase the project’s production to over 8 mtpa.  OSH is currently looking for the gas needed to support the third train, and we are confident of exploration success.

There is around 20 trillion cubic feet of gas in Gulf of Papua and OSH holds significant acreage in the area.

Demonstrating how significant the step change in production will be, OSH’s output is expected to increase to over 16 mmboe in FY14, with that figure then jumping again to just below 25 mmboe in FY15.

This compares to FY12’s production estimate of 6.2-6.7 mmboe, thus implying a significant boost to earnings and cash flow in coming years.

Outlook

With second half production expected to remain strong, OSH stuck to its previous guidance for FY12 production to be within a range of 6.2 – 6.7 million barrels of oil equivalent (mmboe).

Complementing its output, OSH is also likely to benefit from the price of oil, which has risen around 15% since the latter part of June. The key value driver, however, remains PNG LNG.

As we head closer to first output in 2014, and barring no unexpected cost overruns with the project, we expect PNG LNG to become a bigger factor behind OSH’s share price strength.

We anticipate these factors will continue to underpin OSH share price and as such think it’s a stock to watch in the near-to-medium term.