Oil Search Limited

OSH Details

Key Takeaways of OSH and STO Proposed Merger: Oil Search Limited (ASX: OSH) is an oil and gas exploration and development company with operations in Papua New Guinea (PNG) and the United States of America. OSH recently entered into a Merger Implementation Deed with Santos Limited (ASX: STO) to combine the two companies via an Oil Search Scheme of Arrangement.

• Transaction Details: As per the terms of the Merger, the shareholders of OSH will receive 0.6275 new STO shares for each OSH share held and once the merger is complete, OSH shareholders will own approximately 38.5% of the merged entity and the remaining 61.5% will be owned by STO shareholders.
• Board Approval: The Board of OSH have unanimously approved the transaction and recommended its shareholders to vote in favour of the Merger in the absence of a Superior Proposal.
• Completed Due Diligence: Both the companies have completed reciprocal confirmatory due diligence in relation to merger.
• Key Approvals Required: The Merger still requires several key conditions to be fulfilled, including receiving approval from OSH shareholders and Papua New Guinea court; customary regulatory approvals, approval from Independent Expert and other conditions customary for a public transaction of this nature.
• Key Dates: The record date of the merger is 9 December 2021, and the implementation date is 16 December 2021.

Rationale Behind the Proposed Merger: The combination of STO and OSH will result in creating a large-scale energy company, which will be amongst the top 20 largest global oil and gas companies.

• Diversified Portfolio: The merged entity will have a unique diversified portfolio of long-life, low-cost oil and gas assets, which will generate strong cashflows.
• Rise in Resource base and Production: The merged entity will result in combined 2021 production of approximately 116 million barrels of oil equivalent and a combined 2P+2C resource base of ~4,867 million barrels of oil equivalent.
• Unlocking Synergies: It is expected that the Merger will unlock pre-tax synergies of US$90-115 million per annum which will benefit both sets of shareholders.

H1FY21 Result Highlights:

• Rise in Revenue: For H1FY21, OSH reported total revenue of US$668 million, up 7% on pcp, driven by oil price recovery.
• Decline in Production Cost: Despite the cost impact from COVID-19, earthquake remediation and PNG LNG shutdown, the company’s production costs declined by 6% YoY to US$143 million.
• Improved Profitability: NPAT for H1FY21 stood at $139 million, compared to the loss of US$266 million in H1FY20.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the risks related to the fluctuations in the price of oil and gas which could impact its financials. Further, the COVID-19 uncertainties and associated restrictions could disrupt the company’s operations and hamper its supply chain.

Outlook: Looking ahead, the company is focused on optimising its portfolio and allocating capital towards higher returning developments. For FY21, the company expects its production to be in the range of 25.5 – 28.5 mmboe and unit production cost to be between $10.50 – 11.50/boe.

Stock Update: OSH recently secured US$565 million revolving credit facility with an expiry date of 31 December 2026. Further details of the merger are expected to release in October 2021. Over the last three months, the stock has corrected by ~8.04%. The stock has a 52-week high and low of A$2.5 and A$4.62. At the market close of 13^th September 2020, OSH was trading at a price of A$3.74, up by ~0.268%.

OSH Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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