Oil Search Limited

OSH Published 2018 Annual Report: Oil Search Limited (ASX: OSH) has an engagement in the exploration, development, and production for hydrocarbons. The company recently published 2019 Annual Meeting presentation, where it reported full year (2018) production of 25.2 mmboe which is 17% lower than the year 2017, majorly due to temporary shutdown of operations following Feb 2018 earthquake. The PNG LNG project achieved annualised production rate of 8.8 MTPA in H2FY18, which is highest half-year rate achieved since project start-up in 2014.  

Financial Performance for FY2018: Due to a natural calamity (earthquake), productionwas down by 17%, offset by 27% increase in average realised oil and condensate price and 31% rise in average realised LNG and gas price. The net profit after tax increased by 13% to US$341 Mn, and its operating cash flow was reported at US$855 Mn.

Q1FY19 performance:In Q1 FY 2019, the total production was reported at 7.25 mmboe, which was 3% lower than 7.44 mmboe. Total sales decreased by 15% from 7.82 mmboe in Q4FY18 to 6.65 mmboe in Q1FY19.


Sales Metrics (Source: Company Reports)

LNG Outlook: Global LNG demand grew by 6% in 2018 to 320 MT, and it is expected to grow at 4.5% p.a. to 2030, which is supported by the government policies and by the fact that North East Asia markets are increasingly prioritising gas over coal and nuclear. Around ~90 MTPA of uncontracted demand expected by 2025, with ~120 MTPA of new supply required by 2030.

What to Expect: As per the company report, there is a potential to double production by mid-2020s with Papua LNG and PNG LNG/P’nyang developments in PNG and Pikka Unit oil development in Alaska. Production under three projects which are Development of Papua LNG; Expansion of PNG LNG; and Development of Pikka Unit Nanushuk field in Alaska, is expected to more than double y 2024/25. All the three projects are expected to make Front-End Engineering and Design (FEED) decisions in H2FY19, with Final Investment Decisions (FIDs) by 2020.

As per the 2019 production guidance, OSH-operated PNG Oil and Gas are estimated to be in the range of 4.0-5.5 mmboe; and PNG LNG project is estimated to be in the range of 24-26 mmboe.

Stock Recommendation: Its Gross margin, EBITDA margin, and Net margin for FY18 stood at 54.5%, 68.1%, and 22.2%, better than the industry median of 27.6%, 13.8%, and 5% respectively, implying decent financial position of the company than its peer group.

Hence, considering the aforesaid facts and current trading level, we recommend a “Buy” rating on the stock at the current market price of $7.580 per share (up 0.132% on May 10, 2019).

Origin Energy Limited

Under-Valued Position Of ORG’s Stock at Current Juncture: Origin Energy Limited (ASX: ORG) explores and produces natural gas; generates electricity; and is engaged in wholesale and retail sale of electricity and gas; and sale of LNG.

The company recently published its production and financial highlights for FY2018. Its businesses are generating significant cashflows. Its credit rating has been upgraded to BBB stable/Baa2 stable. In its recent Macquarie conference, it was mentioned that its portfolio management comprises continued non-core asset sales and investment in centralised energy services.

During the year, ORG provided price relief to its customers by absorbing higher wholesale costs in NSW with reduced prices for concession customers. It witnessed improved net promoter scores with increase in number of its digital interactions. The lower market prices reduced the company’s earnings. As per March 2019 quarter report, Australia Pacific LNG (APLNG), where ORG has 37.5% interest, delivered its highest-ever quarterly revenue of $763.9 Mn (Origin Share), which is an increase of 53% as compared to previous corresponding period.ORG’s share of production was stable at 63 PJ. In the Energy Markets business, Electricity sales volumes up 7 % on the previous quarter driven by higher retail demand over summer, which was partially offset by lower Business volumes. As the gas sales to wholesale customers declined in the quarter, the company directed additional gas to generation where it helped to meet peak summer demand in the electricity market.

During the quarter, ORG announced the acquisition of OC Energy to grow its Centralised Energy Services business and also made a minority equity investment in Intertrust Technologies, to build capability in and deliver digitally enabled customer solutions.

 

Production & Sales Metrics (Source: Company Reports)

What to Expect: In Energy Market business and with respect to retail, the company aims to reduce cost by more than $100 Mn by FY2021 and grow new revenue streams via centralised energy services, Solar, Storage and Adjacencies. With regards to Energy Supply & Operations, it plans to grow low cost renewables. With respect to Integrated Gas – LNG market, there are expectations of continuing strong Asian LNG demand growth and significant new US supply over 2020 – 2022. APLNG (37.5% interest of ORG) is expected to deliver stable production despite planned outages on gas processing facilities in 2019.

Stock Recommendation: ORG’s net margin for H1FY19 stood at 10.4%, better than the industry median of 4.9%, which implies company showed better bottom line performance than its peer group. On valuation front, its PE multiple for TTM stands at 10.710x, lower than the peer median of 16.89x, indicating under-valued position at the current juncture.

Hence, considering the aforesaid facts and current trading level, we recommend a “Buy” rating on the stock at the current market price of $7.510 (up 0.941% on May 10, 2019).  

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