Company Overview - Oil Search Limited, is an oil and gas exploration and development company. The Company’s PNG LNG Project is 6.9 million tons per annum (MTPA) integrated LNG project operated by ExxonMobil PNG Limited, a subsidiary of Exxon Mobil Corporation. The Company has a 29% interest in the PNG LNG Project. The Kutubu Oil Project, which was Papua New Guinea's commercial oilfield development, is located in the southern highlands of Papua New Guinea and takes its name from nearby Lake Kutubu. The Kutubu development consists of a network of wells that produce oil from the Iagifu-Hedinia, Usano and Agogo fields, a gathering system and on-site processing facilities (the Agogo and Central Processing Facilities) and supporting infrastructure, as well as a 265 kilometer export pipeline to the coast and a marine loading terminal in the Gulf of Papua.
Analysis - As part of the 2014 results, Oil Search (OSH) reported about three times higher record production of 19.3 million barrels of oil equivalent (mmboe) in 2014 than that reported in 2013. There was 72% increase in reported net profit after tax, to US$353.2 million including US$129.6 million of impairments after tax primarily emanating from lower oil prices on the carrying value of exploration and evaluation assets. The core profit surged 135% to US$482.8 million from 2013 excluding the one-off items.
2014 Highlights (Source – Company Reports)
The Company declared the final dividend for 2014 as an increase from two cents per share in 2013 to eight cents per share along with a special dividend of four cents per share. The total dividend for 2014 resulted in 14 cents per share as opposed to only four cents per share in 2013 indicating a 44% payout ratio based on 2014 core profit. Primarily, OSH has undertaken a proportional dividend payout ratio based strategy entailing paying between 35% and 50% of core profit in order to maintain a good balance between reinvesting cash flows into high-returning growth projects and providing predictable returns to shareholders.
Highlights of Quarter ending 31 March 2015 (Source – Company Reports)
The quarterly results for period ending March 2015 were little below expectation with total production in of 6.91 mmboe as opposed to 7.24 mmboe in the previous quarter owing to scheduled maintenance. But OSH seems to be confident to deliver 2015 production within the 26 – 28 mmboe guidance range with production net to the Company from the PNG LNG Project of 5.27 mmboe while the base PNG oil and gas business contributed 1.64 mmboe. The oil prices have played a havoc with an effect on total revenue which was found to be 16% lower to US$472.3 million than the previous period. The average realised LNG and gas price was US$12.37/mmBtu which is also a 14% dip from the fourth quarter. The average realised oil and condensate price dropped 30% to US$51.29/barrel. OSH benefitted from the financial completion of the PNG LNG Project in February with the release of more than US$850 million in cash previously escrowed in PNG LNG Project related accounts. Overall, the Company reported cash of US$1,067.2 million and debt of US$4,331.7 million, including entirely of PNG LNG Project finance facility debt following the repayment of US$150 million, at the end of March 2015. The total liquidity amounted to US$1,817.2 million entailing US$750 million of undrawn corporate credit facilities at the end of the quarter.
2015 Exploration and Appraisal Programme (Source – Company Reports)
The recent talked about news is the commencement of the testing programme of the Antelope 5 well on the Elk/Antelope gas field in PNG which has been quite interesting. OSH stated that the programme along with drilling of Antelope 6 on the eastern flank of the field will enable delineation of the size, reservoir connectivity and productivity of the Elk/Antelope gas field.
As per the Company, Antelope 4 appraisal well (now suspended) together with Antelope 5 have delivered results that provide an evidence for a commercially attractive new LNG development. This was further substantiated with the result that Antelope-5 flow rate was constrained by reservoir engineers to a maximum test rate of about 70 million standard cubic feet a day. Further, Antelope 5 is identified as the one with superlative reservoir thickness, quality and fracture density of all wells on the field. The Antelope 5 appraisal well also encountered the gas carbonate reservoir broadly in line with prognosis. As per March updates, the Antelope 5 reached a total depth of 2,453 metres in a 6” hole. It has been figured out that drilling operations at Antelope 4 were suspended at a measured depth of 2,134 meters with cores cut in the upper part of the reservoir as planned leading to a recovery of 33 meters of dolomite. The indication of the well intersecting a fracture system came based on experiencing substantial mud losses at 2,110 meters. Overall, we see that results from Antelope 5 are supportive of a 5.3 trillion cubic feet gas resource and progress at Antelope 6 in 2015 is expected to help increase resource size.
Flow Test at Antelope 5 (Source – Company Reports)
The March drilling updates revealed that Taza 2 oil appraisal well was at a total depth of 4,200 metres with preparations to continue the testing programme being underway. Taza 3 oil appraisal well was also found to be at a depth of 3,724 metres in a 6” hole but the fishing operations to free the drill string that got stuck down-hole proved to be ineffective. Not much is expected from Taza 2 and 3 in terms of good flows. Taza 4 on the other hand seems to have promising potential given the fact that 3D seismic is to be used for selecting a drill location that targets an area of advanced natural fracturing.
Progress is also seen with regards to the P’nyang joint venture given the development license application made some time back. Results for the Hides F1 (Hides Deep) gas well were little disappointing in view of the deeper Koi Iange interval being confirmed as water bearing. Good point is that the commercial decision on gas expansion with PNG LNG did not factor-in the deep section owing to the risk associated with it.
We also make a note of the announcement on ExxonMobil PNG Limited, the operator of the PNG LNG Project, advising the execution of an agreement for the supply up to 25 megawatts of electricity to PNG Power for local use. This is also a positive sign of development for PNG LNG. OSH is working closely with the PNG Government and Government-owned PNG Power Ltd (PPL) through the Ramu Power Project for the availability of electricity available to people in the PNG Highlands regions. Updates about completion of the first phase of the project with the commencement of continuous 24-hour power generation and supply to Tari have been shared by the Company. OSH has informed that Ramu Power Project through its future phases will provide additional infrastructure such as new transmission lines and up to 100 MW of additional electricity generating capacity. The project will thus be able to provide connection and delivery of reliable, affordable power to various homes, businesses, hospitals and schools situated within 20 kilometres of the Ramu Grid.
PNG_Ramu Power Project (Source – Company Reports)
Risks related to production outages at the PNG LNG project, inflation related production costs, and failure in achieving exploration results (such as appraisal results for the Hides gas field or from Elk/Antelope appraisal drilling) do prevail.
OSH Daily Chart (Source -Thomson Reuters)
Overall, PNG LNG project is resulting in bringing in cash flow. Performance has been strong with trains operating above nameplate capacity. Then, the amount held in escrow by OSH against project lender obligations is set to be released back. The soft start with slightly low production at PNG LNG from scheduled maintenance during the first quarter is expected to be made up in June quarter in view of OSH’s reassurance of the CY15 production guidance. We also note that the quarterly revenue of US$472m has been satisfying though not great in support of the average LNG price of US$12.37/mmbtu. The Company is having pronounced margin producing assets along with attributes such as robust delivery record. Of course, we do see impact from the turbulent oil price driven environment but expect a recovery to the helm of OSH’s benefits.
We therefore put a BUY recommendation for this stock at the current price of $8.07.
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