Oil Search Ltd (ASX: OSH) is an oil and gas exploration and development company. Oil Search operates oil and gas fields Papua New Guinea (PNG) and has a 29% interest in the ExxonMobil-operated PNG LNG project. Oil Search also has interests in the United States. Oil Search has a market capitalisation of A$4.6 billion.
Why has the global oil price slumped?
The recent drop in oil prices is caused by supply and demand issues. On 5-6 March 2020, OPEC and non-OPEC oil producers met in Vienna to discuss oil production and prices in the wake of weakening global demand due to lower global economic activity in part due to the impact of the coronavirus (COVID-19). The meeting concluded with Saudi Arabia and Russia not agreeing to cut production to increase the price of oil. This has resulted in Saudi Arabia and Russia embarking on a production war to capture increased share of the global oil market regardless of the implications for the price of oil. This is the supply issue for the global oil market, and with production exceeding demand global oil prices dropped significantly. On the demand side, COVID-19 is causing a large fall in global oil demand, putting further downward pressure on global oil prices. Interestingly, even after the most recent agreement with OPEC and non-OPEC oil producing countries, this agreement did not help global oil prices, the WTI oil futures price hit US$0 today (21 April 2020).
For a moment, the oil price futures fell below US$0, which has never happened before in history, which means that oil companies must pay buyers of oil to buy oil.
What are the key points of Oil Search quarterly report?
Production for the March quarter 2020 was 7.73 (mmboe), up 5% compared with the previous quarter. Total revenue fell by 20%, this was impacted by a 13% fall in sales, due to timing of shipments and 20% lower oil prices.
Oil Search management notes a continuation of a 40% reduction in 2020 forecast investment expenditure, from US$710-845 million to US$440-530 million. Operating expenditure is expected to be cut through salary cuts, headcount reduction and discretionary expenditure cuts. Further, to improve Oil Search’s balance sheet, the company successfully raised US$700 million (announced 7 April 2020).
What is the outlook for Oil Search?
The short-term outlook for Oil Search is dependent on global oil prices, which currently is not favorable for Oil Search. On the demand side, the continued spread of COVID-19 should lower the demand for oil, as cities are in lock down, major airlines around the world have cut international flights and global economic activity weakens. Looking beyond the short term, the outlook for the global oil price is more positive once the economic environment returns to more normal conditions and issues around COVID-19 fade.
What is the market reaction to Oil Search quarterly’s activity report?
The market reaction to Oil Search’s announcement is negative. Oil Search is down around 6%, which is more than the Australian market.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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