Oil Search Limited

OSH Details

Redetermination of Participating Interests: Oil Search Limited (ASX: OSH) is engaged in the exploration of oil and gas fields and also develops such fields. As per a recent update, the company has announced that it has reached a commercial agreement in regard to the redetermination of participating interests with its JV partners in the PNG LNG project. As per the agreement, OSH will be entitled to a carried interest of US$176 million from certain non-PNG State joint venture partners, over the years ending 31 December 2022 to 31 December 2024 in respect of certain agreed PNG LNG capital expenditures.

Implementation of Merger Deed:

On 10 September 2021, OSH and Santos Limited have announced that they have entered into a Merger Implementation Deed, under which both the companies will combine via an Oil Search Scheme of Arrangement. Under the agreed terms, OSH shareholders will receive 0.6275 new Santos shares for each Oil Search share held on the record date of the Scheme of Arrangement i.e 2 August 2021. Upon execution of the transaction, OSH shareholders will own ~38.5% of the merged entity, whereas Santos shareholders will own ~61.5%.

H1FY21 Performance Update:

The company delivered decent performance during the period with growth in profitability.

• It posted revenues of ~US$668 million during the period, compared to revenues of ~US$626 million in H1FY20. The growth was on account of a recovery in oil prices during the year.
• However, sales volume decreased by ~2% during the year, owing to the planned five-week major maintenance at PNG LNG project.
• The Group reported a turnaround in profitability with NPAT at ~US$139 million in H1FY21, compared to negative ~US$266 million in the pcp. This was achieved on the back of a decrease in exploration expenses, reduction in finance costs owing to reduced debt, and decrease in production costs.
• It ended the period with a net debt position of ~US$2,122 million as of 30 June 2021, down from ~US$2,376 million as of 31 December 2020.

Trend in Revenue (Source: Analysis by Kalkine Group)

Key Risks: The company’s profitability is dependent on the realised prices of oil and gas commodities and is prone to volatility in price fluctuations.  

Outlook: The company expects to deliver decent performance in FY21, with positive FY21 revenue and cashflow outlook aided by higher realised prices when compared to FY20. It has maintained production guidance to be between 25.5 – 28.5 mmboe, and unit production cost guidance maintained between 10.50 – 11.50 US$/boe in FY21. The company also anticipates FY21 distribution to be in line with the Group policy of 35-50% of core NPAT.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of OSH is trading above its average 52-weeks' levels of $2.520-$4.690. The stock of OSH gave a positive return of ~59.23% in the past one year and a positive return of ~22.19% in the past one month. The stock has a support level of ~$4.04 and a resistance level of ~$4.68. The stock has been valued using EV/Sales multiple-based illustrative relative valuation and arrived target price with a correction of high single digit (in % terms). The company might trade at a slight premium to its peers, considering the improved profitability performance, and reduction in net debt position. For the purpose of valuation, peers such as Santos Ltd (ASX: STO), Woodside Petroleum Ltd (ASX: WPL), Beach Energy Ltd (ASX: BPT) have been considered. Considering recent rally in the stock price, higher cash cycle days, and the other key risks associated with the business, we give a ‘Sell’ rating on the stock at the current market price of $4.605, as on October 13, 2021, 1:23 PM, (GMT+10), Sydney, Eastern Australia.

OSH Daily Technical Chart, Data Source: REFINITIV

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

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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