Company Overview: Oil Search Limited is an oil and gas exploration and production company. The Company is engaged in the exploration for oil and gas fields and the development and production of such fields. The Company's segments include PNG Business Unit (PNG BU), Exploration and Other. The PNG BU segment is engaged in the development, production and sale of liquefied natural gas (LNG), crude oil, natural gas, condensate, naphtha, other refined products and electricity from the Company's interest in its operated assets for Papua New Guinea crude oil and Hides gas-to-electricity operations and from the Company's interest in the PNG LNG Project. The Exploration segment is engaged in the exploration and evaluation of crude oil and gas in Papua New Guinea. The Other segment includes the Company's ownership of drilling rigs, investment and development towards the Company's power strategy and corporate activities. The PNG LNG Project is a 6.9-million tons per annum (MTPA) integrated LNG project.


OSH Details

Oil Search Limited (ASX: OSH), engaged in oil and gas exploration and production services, has witnessed a bit challenging year given the volatility in oil prices. The third quarter performance however benefitted from the price scenario and support from gas fundamentals. The group is also gearing up well post the MoU entered between Papua LNG JV and the PNG Government for the development of 5.3 mtpa Papua LNG project. While the group reported a dip in last interim financials, the medium to long term outlook is expected to improve given the developments.
 

Financial Aspects (Source: Company Reports and Thomson Reuters)

Record Production in the Third quarter 2018: OSH has posted 39% increase in the total production to 7.5 million barrels of oil equivalent (mmboe) in the third quarter of 2018 compared to the second quarter and close to the pre-earthquake level of 7.6 mmboe produced in the fourth quarter of 2017. This took production for the nine months to 30 September 2018 to 17.8 mmboe. Oil Search’s operated production has been up by about 69 % in the third quarter (to 0.8 mmboe) and this was owing to recommencement of production from Moran and Agogo fields. Almost a full quarter contribution came in from other fields that also helped the production. The company expects to ramp up the production from their operated oil and gas fields progressively as the company continues with the remedial work. Particularly, OSH could restore the flow lines in remote locations that were damaged by earthquakes and now the wells have been brought back online. PNG LNG Project witnessed record production given the modifications on the Hides Gas Conditioning Plant and maintenance work on LNG trains; while production was halted given the natural catastrophe. The Project has averaged 8.9 MTPA in the third quarter, 9.0 MTPA in September and reached daily rates of 9.2 MTPA, which are the highest quarterly, monthly and daily annualised production rates achieved since the Project came onstream in 2014. OSH now reported the current production of about 30% above nameplate capacity. This was in view of an extra expenditure made by the group that helped in achieving significant value to Project stakeholders. The group’s reserve position at the project post the material upgrade, after recertification of PNG LNG fields in 2016, helped the production levels. The company has scheduled no significant downtime for plant maintenance in the second half of the year.


Third Quarter 2018 Performance (Source: Company Reports)

Strong Performance supported by LNG: Higher oil and gas prices helped OSH achieve an average realised oil and condensate price of US $ 76.17 per barrel. This reflected an increase of 5% on the second quarter. Further, the average realised LNG and gas price of US $ 10.45/ mmBtu was noted and this is 18% higher than the previous period. The higher prices and improved production and sales volumes led to a growth of 81% in total revenue to US $ 474.9 million. This has been the highest quarterly revenue achieved since fourth quarter of 2014. Thus, OSH benefitted from the 68% rise in LNG and gas sales, and 31% increase in liquids sales, with realised LNG and gas prices up 18% and oil and condensate prices up 5%. The operating cash flow scenario helped in refining the liquidity position (from US $ 1.26 billion at mid-year to US $ 1.44 billion at the end of September) and supports company’s financial position.


PNG LNG Commitments (Source: Company Reports)

Papua LNG JV signed MoU with PNG Government: The Papua LNG joint venture participants have signed a Memorandum of Understanding (MoU) with the Independent State of Papua New Guinea for the development of the Papua LNG Project; and this agreement is a significant milestone for the Papua LNG Project. It sets the premise for a Gas Agreement that appropriately allocates Project benefits and returns for the stakeholders. This step has come post the joint venture parties reached an alignment in the beginning of 2018 with regards to the downstream concept for the next phase of LNG development. The agreement comprises of the construction of three 2.7 MTPA LNG trains for the production of 8 MTPA at PNG LNG Project plant site. Under this, two trains will get gas from Elk-Antelope fields and one train will receive gas from the existing PNG LNG fields and P’nyang field. It has been noted that Elk-Antelope and P’nyang have over 11 tcf of undeveloped, 2C gas resource. As of now, the MOU touches upon terms and conditions for the main Gas Agreement (with tax rates and Domestic Market Obligation), and timeline for final negotiations. The Gas Agreement has been slated for signing before March 31, 2019.

Advancing with the discussions on the proposed Papua LNG and additional PNG LNG train developments: The group has flagged for discussions among PNG LNG Project, the P’nyang (PRL 3) and Papua LNG (PRL 15) joint ventures. These relate to the proposed development of three new LNG trains - two underwritten by Papua LNG and one by the PNG LNG and P’nyang gas fields. OSH is now continuing with negotiations between the Papua LNG and PNG LNG on the terms for access to the plant site; and the parties continue to mature the technical definition for developments, and plan for FEED studies, project financing and related activities required for a seamless integration. Moreover, the discussions with the State Negotiation Team (SNT) are also progressing well in view of project and economic information.

Total contracted volumes from the PNG LNG Project increased to 7.5 MTPA: Oil Search Limited’s PNG LNG Project co-venturers signed a mid-term LNG sale and purchase agreement (SPA) with BP Singapore Pte. Limited for supplying LNG, commencing in August 2018. As per the mid-term SPA, LNG will be provided to BP - approximately 0.45 million tonnes of LNG per annum over the initial three-year period, and this will then rise to approximately 0.9 million tonnes of LNG per annum over the subsequent two-year period. OSH holds a 29% in the ExxonMobil-operated PNG LNG project and the adjacent P’nyang field in Papua New Guinea. Further, the agreement has increased the customer base for LNG from PNG LNG. With this contract, the total contracted volume from the Project has risen to approximately 7.5 MTPA, along with the mid-term sale to PetroChina, and 6.6 MTPA committed under long-term contracts to JERA, Osaka Gas, Sinopec and CPC. Moreover, ExxonMobil, has been negotiating with other parties for the final mid-term tranche of up to 0.45 MTPA; and there is an expectation of an agreement to be concluded in the near-term. This is expected to enhance total sales under new mid-term agreements to 1.3 MTPA.

Preparing for the Alaska drilling season: Two appraisal wells are to be spudded in January and March 2019, respectively, and drilled in the Pikka Unit. The main objective of these wells is to constrain the continuity of the Pikka B and C reservoirs and to establish reservoir deliverability. If this appraisal programme becomes successful and continuity of the reservoir is confirmed, approximately 250 million barrels could be added to the company’s current 2C resource estimate of 500 million barrels, as additional resource is migrated into the 2C category. Two high-quality, modular rigs have been contracted and OSH is currently waiting for final approvals for the drilling plans. The results from these wells will help define the final configuration of the Pikka Unit development, and its entry into Front-end Engineering and Design (FEED) is expected in mid-2019.

Revised the 2018 Guidance Upwards: On the back of strong performance from the PNG LNG Project since it recommenced production after the earthquake, the lower end of the 2018 full year production guidance range has been raised. OSH now expects 2018 full year production to be between 25 - 26 mmboe against the previous guidance of 24 – 26 mmboe. The guidance for full year unit operating costs has been narrowed to US $ 11.50 – 12.50 per boe against the previous guidance of US $ 11 – 13 per boe. However,  the guidance for other operating costs and depreciation and amortisation for the full year 2018 was retained as is. The company has reduced the upper end of the capital cost guidance range due to the re-phasing of activities.


Guidance for the Full Year 2018 (Source: Company Reports)

Stock Recommendation: Meanwhile, OSH stock has fallen 14.29% in three months as on December 04, 2018. The company’s stock is trading at A$7.40 and has an immediate support at $7.15 and resistance at $9.22 level. During the third quarter, OSH has delivered record production with the PNG LNG Project achieving record production levels. Papua New Guinea’s reputation for dependable LNG delivery to various markets has been building up and supporting OSH. This also provides competitive advantages for further investment and development. Further, the company has revised the full year 2018 guidance due to the strong performance in the third quarter. The renewed expectations from PNG and value from Alaska assets are the key drivers for growth. Based on the foregoing and prevailing low levels that offer tangible value, we give a “Buy” recommendation on the stock at the current price of $ 7.40, given a possible single digit upside momentum in the next 12-24 months.
 

 
OSH Daily Chart (Source: Thomson Reuters)

 
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