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Oil Search - Is it good to buy the stock amidst the takeover saga?

September 15, 2015 | Team Kalkine
Oil Search - Is it good to buy the stock amidst the takeover saga?

The takeover buzz


The buzz is getting louder and louder about a move from Woodside Petroleum potentially worth $ 10.2 billion on this Company which is an oil and gas player in Papua New Guinea. News reports suggest that independent sources in London and Port Moresby have revealed plans for a hostile approach to be made by Woodside Petroleum (WPL) despite the potential problems because of the stake held by the PNG government in Oil Search. WPL’s conditional and non-binding proposal apparently entails acquiring all of the shares in Oil Search in consideration of 1 WPL share for every 4 OSH shares. Market sources also suggest that the investment banker involved in the transaction is Bank of America Merrill Lynch. Woodside is declined to comment on the speculation and the move would represent a bit of a surprise because Woodside Chairman Michael Chaney is known to be cautious about investment in the PNG region. However, the decline in crude oil prices and the consequent decline in oil and gas stocks has created windows of opportunity for operators such as Woodside who have no shortage of cash.


OSH 1H2015 Highlights (Source - Company Reports)
 
Against the background of this takeover talk, the Oil Search is set to close down its office in Brisbane and has cut some jobs as part of the restructuring in response to low oil prices. The functions presently carried out from Brisbane will be moved to Sydney along with some of the staff. Some jobs are also being reduced in PNG and some support functions are being shifted from field operations to Port Moresby. No exact numbers are available. The Company, which is 10% owned by the PNG government, is the biggest partner of ExxonMobil in the $ 19 billion in the PNG Liquefied Natural Gas Project which started production more than one year ago and has spearheaded a boost in the export earnings of PNG.
 

Results for the first half ended 30 June 2015


Total production was up 167% to 14.32 mmboe while total sales increased by 205% to 14.45 mmboe. Net profit after tax grew by 49% to USD 227.5 million which is the highest half yearly profit in the history of the Company despite the environment of weaker prices for oil and gas. Total revenues jumped 69% to USD 863.8 million due to a threefold increase in sales of oil, condensate and LNG reflecting a full period of production from the project. The higher sales volumes were partly offset by a sharp reduction in realised prices of USD 56.34 per barrel compared to USD 111.57 per barrel in the first half of 2014 and USD 10.19 per mmBtu for LNG compared to USD 14.20. Unit production costs fell by 43% from USD 15.49 per boe to USD 8.90 because of the higher proportion of low-cost production and successful initiatives for cost reduction in operations. The cash operating margin at 75% is strong and compares favourably with the Company's peers. Net operating cash flow more than doubled to USD 516.8 million, and as at 30 June 2015, total liquidity was USD 1.583 billion comprising cash of USD 543 million and undrawn debt facilities of USD 750 million. An interim unfranked dividend of 6 cents per share was announced compared to 2 cents in the previous period.


OSH Full Year Guidance (Source - Company Reports)
 
During this period, the Company has commenced a Business Optimisation Program which is zeroed in on a range of initiatives to recalibrate further the cost base and organisational structure, and improve operating efficiency and productivity across the entire business. These initiatives together with other business process improvements will be rolled out in the second half of the year. The Company continues to focus on attractive long-term projects that can deliver superior returns even in a continued environment of low oil prices and seeks to leverage its portfolio of high-quality assets and the strength of its balance sheet.


OSH Revenue (Source - Company Reports)

Managing director Peter Botten said that the company is well equipped to manage the current cycle of low oil prices because it has close to USD 1.6 billion in liquidity, a high cash operating margin, production costs that are highly competitive and an optimisation process which will reduce costs further while making for greater efficiency. He further said that the PNG LNG project performed better than expected producing at an annualised rate of approximately 7.1 MTPA which is in excess of the nameplate capacity of 6.9 MTPA. This was bolstered by the strong upstream deliverability which also demonstrated excellent capabilities. To date, 119 cargoes of LNG have been loaded since the commencement of production and all four contract customers are taking delivery of their contractual volumes as well as more than 65% of the spot volumes highlighting the strong levels of acceptance of the project. A key focus is to continue to optimise production activity and review potential opportunities for debottlenecking which could further increase LNG volumes and add value to all investors in the project.
 
Among the key events for the Company were the early appraisal results from the Antelope drilling campaign and agreement by the PRL 15 joint venture with endorsement from the PNG state and Gulf Province governments of the site locations of the PNG LNG project developments which will be underpinned by the Elk-Antelope gas fields. The initial appraisal and testing activities have been encouraging and, though there is appraisal work remaining, if the forthcoming drilling program is successful, the Company hopes to enter the Front-End Engineering and Design phase during 2016. In addition, a major step forward on the potential expansion of the PNG LNG project was signing of a Memorandum of Understanding between ExxonMobil PNG limited and the PNG government at the beginning of the year. This sets out a schedule for the proposed development of the P' nyang gas field to support the provision of gas for domestic use and the expansion of the PNG LNG project. Once the Petroleum Development License has been granted, the intention is to integrate this field into the PNG LNG project.


Oil Search Dividends (Source - Thomson Reuters)

On looking forward to the second half of the year and beyond, Botten said that there are different views on the market on how long the lower prices of oil and gas will prevail and he believes that it will be prudent for the Company to plan for a prolonged period of prices remaining at current levels. The Company is well placed financially because it has production assets which are highly profitable at the current prices and strong balance sheet and liquidity. Nevertheless, there will continue to be an ongoing focus on prudent capital management to ensure the necessary funding of the current commitments and growth opportunities.


OSH Daily Chart (Source: Thomson Reuters)
 
In view of this, we put a BUY recommendation for this stock at the current price of 7.27.


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