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Oil Search Response To Coronavirus Outbreak And Weakening Oil Prices

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

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 per cent 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$3.57 billion.

old-field-sunset

Update on Coronavirus

The coronavirus (COVID-19) was first reported from the Wuhan province in China on 31 December 2019. The World Health Organisation data shows a total of confirmed cases of 292,142 and 12,787 deaths globally. As of today (23 March 2020), there have been over 1000 confirmed cases and 7 have died of COVID-19 in Australia.

 

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, with production significantly increasing while exceeding demand, global oil prices dropped significant to around US$20 per barrel from US$55 – US$60 per barrel. On the demand side, COVID-19 is causing a fall in global oil demand, putting further downward pressure on global oil prices.

 

What is the update on Oil Search share price?

In the last month, Oil Search share price has fallen by 63%. Oil search is currently trading at around A$1.99.

 

What is Oil Search response to the Coronavirus (COVID-19) and falling oil prices?

Oil Search 2020 revised guidance is shown in the table 1:

 

Table 1 – 2020 revised guidance

Regarding Oil Search’s developing activities, Oil Search management notes that all work on production systems for the Pikka Unit Development will be placed on hold. In addition, ExxonMobil, as the operator of the PNG LNG Project announced that developments on the Angore field in PNG will be suspended.

 

What is the outlook for oil prices?

The short-term outlook for global oil prices is negative. On the supply side, it is unclear whether Saudi Arabia and Russia can come to an agreement to cut production in order to increase the global price of oil. This is considering both countries have publicly announced that they have the capacity to last out this production war for several years. 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.

Oil Search management notes that the company’s balance sheet and liquidity position is sufficient to navigate the company through this challenging environment. Oil Search financial profile is shown in table 2:

Table 2 – Financial profile

 


Disclaimer:


This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.

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