Company Details - Oil Search Limited is engaged in the exploration, development and production of oil and gas fields. The Company holds interest in the PNG LNG Project, a liquefied natural gas (LNG) development project. It holds interest in Papua LNG Project. Its segments include PNG oil and gas, which includes the exploration, evaluation, development, production and sale of crude oil, natural gas, condensate and other refined products from its interest in its operated assets for PNG crude oil and Hides gas-to-electricity operations; PNG LNG Project, which includes the exploration, evaluation, development, production and sale of LNG, condensate, naphtha and electricity from its interest in the PNG LNG Project; Middle East and North Africa (MENA) oil and gas, which includes exploration and evaluation of crude oil and gas through its license interests in the Republic of Yemen, Republic of Iraq and Tunisian Republic, and Other, which includes its ownership of drilling rigs and corporate activities.
 

OSH Details 
Production & Revenue for the third quarter 2016: Oil Search Limited (ASX: OSH) has posted a decent third quarter of 2016 performance, wherein the total production reached 7.63 million barrels of oil equivalent (mmboe), which is 6% higher as compared to the second quarter of 2016. The group delivered highest quarterly production during the second quarter of 2016 in OSH’s history, and the continuation of this trend indicates their ability to maintain the production growth. Moreover, the PNG LNG Project was back to full production in the third quarter, after the routine maintenance and a brief unplanned shut-down in the second quarter 2016. The third quarter 2016 production net to OSH from the PNG LNG Project was 5.94 mmboe, which comprised of 25.9 bcf of LNG and 0.87 mmbbl of liquids. The Project produced an annualized rate of around 8.1 MTPA, which is up from 10% as compared to the second quarter of 2016 while reported the highest quarterly rate since it came onstream in 2014, and 17% above the nameplate capacity. Oil Search was able to generate this despite of a small reduction in gas flow and LNG production in August due to the peaceful landholder protest at the Hides Gas Conditioning Plant (HGCP), located in the Hela Province, related to landowners seeking a dialogue with Government regarding progressing land title and benefits distribution issues. The OSH operated PNG oil and gas fields contributed 1.69 mmboe net to Oil Search, as compared to 1.75 mmboe in the previous quarter. Meanwhile, the rise on production during the third quarter of 2016 lead to a 16% rise in revenue as compared to the second quarter of 2016, which reached US$309.5 million. This is due to the 4% rise in the hydrocarbon sales and a 23% increase in the average realized LNG and gas price which was achieved despite the 3% fall in the average realized oil and condensate prices to US$47.24 per barrel, on the back of slightly weaker global oil prices during the period. 

Production and Revenue Highlights (Source: Company Reports)
 
Positive cashflow in the third quarter 2016:OSH continued to generate the positive cash flow in the third quarter 2016. This is due to the OSH’s cash balance increase from US$780 million to US$939 million, while there are no PNG LNG Project finance facility principal payments which are due during the period. The net debt has declined from US$3,304 million to US$3,145 million during the quarter. This reflects the OSH’s high quality assets and competitive cost base. On the other side, InterOil Corporation has received a takeover offer from Exxon Mobil Corporation, which was deemed superior to OSH’s offer made in May. OSH has decided not to exercise its right to match the ExxonMobil proposal. Therefore, the Arrangement Agreement between InterOil and OSH got terminated. Meanwhile, OSH spent US$56.2 million on investment activities for the third quarter of 2016. Exploration and evaluation expenditure reached US$34.5 million, as US$33.7 million was spent for activities in PNG. Antelope 7 well in PRL 15 costed US$16.6 million while preparations to drill P’nyang South 2 well in PRL 3 costed US$2.8 million. The group’s costs related to the Muruk well in PPL 402 reached US$7.6 million while costs related to the Strickland 1 well in PPL 269 was at US$4.3 million. OSH also incurred US$1.4 million of exploration costs for seismic, geological, geophysical and general and administration expenses in PNG and MENA. Expenditure for producing assets reached US$9.1 million during the quarter. 
 

Investment Expenditure (Source: Company Reports) 
 

Completion of Independent gas certification of the Elk-Antelope fields: An independent gas certification of the OSH’s Elk-Antelope fields got finished by the two world-class experts. The average of 1C which is a low estimate contingent and 2C which is a best estimate contingent of the two certifiers are 5.2 tcf and 6.4 tcf of raw gas, respectively. Along with the resources in the P’nyang gas field, OSH has sufficient undeveloped gas resource to underpin at least two additional PNG LNG-sized LNG trains. On the other side, the mobilization and rigging-up at the Antelope 7 appraisal well site has started. The well would offer major data on the potential resource upside on the western flank of the Elk-Antelope field and is anticipated to start drilling in late October or early November. Additionally, the preparations have continued to drill the high potential Muruk 1 exploration well, which is located in the north-west of the Hides field in the PNG Highlands, and the well is expected to spud in November. 

Antelope 7 Gas Appraisal Well (Source: Company Reports)
 
Strategy Refresh:OSH started strategy Refresh in the third quarter 2016, which focused on the potential options and the value that can be done by the cooperation between the P’nyang and Elk-Antelope joint ventures and the PNG LNG Project, and also determined the key activities required to explore the next phase of LNG growth in PNG. It is expected that this work would be finished by the end of 2016.
 
Biomass Project in PNG: OSH has entered Front End Engineering and Design (FEED) on the Markham Valley Biomass Project after the recent acquisition of Aligned Energy Limited’s interests. FEED is targeted to be finished by mid-2017 and is expected to cost around US$15 million. The project is a part of OSH’s new power business, to deliver scalable, reliable and competitively-priced power to domestic, commercial and industrial markets in PNG. OSH’s power business is according to the PNG Government’s policy which would rapidly and materially increase the access to electricity within PNG.
 
Full Year Guidance for 2016:The guidance for the production and operating cost for 2016 remains unchanged, and the production is currently trending towards the upper end of the range. The capital cost guidance is around 12% lower than previously indicated, which reflects the deferral of production capital, some pre-FEED activities into 2017 and lower than expected PNG LNG Project capital spend.

Full Year Guidance (Source: Company Reports) 
 

Improvement in Industry Outlook:Oversupply from major oil producers across the world led to the correction of the oil prices since the last few years. To rebalance the oil market, Russia’s support to cut the supply of oil led to an increase in the price of oil earlier this month which has moved to its highest level since June. The upcoming OPEC meeting next month would give a better clarity on the efforts of the major producers across the world. Moreover, the LNG market is expected to double by 2040 while the regional LNG market in Asia is anticipated to grow by more than 100 MTPA by 2030, with current oversupply tightening by 2022/23. In addition, more than 80 MTPA of existing NE Asia LNG contracts will expire next decade. The potential long term opportunity of LNG is expected to drive the group’s LNG segment. 

Stock Performance: The shares of OSH have surged over13.27% in the last four weeks (as of October 18, 2016) driven by the oil price rally. OSH has reported a strong third quarter as the output from the PNG LNG liquefied natural gas operation in Papua New Guinea has rebounded during the second quarter post some minor planned and unplanned outages. Given the positive industry drivers coupled with the group’s efforts on rising production and focus on LNG, we give a “Buy” recommendation on the stock at the current price of $ 7.23
 

OSH Daily Chart (Source: Thomson Reuters)

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