Oil Search: Glass half full
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 22 February 2017, 9:00 AM
- Sectors Covered:
- Mining, Energy
Oil Search (OSH) released its full year CY16 result yesterday and we view the stock as materially undervalued.
Further value creation unfolding
In Q4, PNG LNG maintained annualised production of 8.4mtpa. After growing its 1P gas
reserves 50% to 2,137bcf (on recertification of its reserves), the path now looks clear for
PNG LNG to be able to maintain elevated operating rates without having to draw on
reserves that are intended for growth (P’nyang and Elk/Antelope).
The recent discovery
at Muruk (which sits close to existing infrastructure and on trend from Hides) continues
to show exciting promise with sidetrack-1 continuing. This discovery has opened up an
entire portfolio of prospective targets sitting on trend with Hides.
Exxon-InterOil given greenlight
Meanwhile, the largest potential value kicker for OSH that is not currently priced in
remains the opportunity for its two flagship LNG projects to be tied together. Cooperation
between PNG LNG and Elk/Antelope just took a large step forward with a Yukon court
approving Exxon’s acquisition of InterOil (all but paving the way for Exxon’s entry into
the Elk/Antelope JV).
OSH estimates cooperation could generate savings of +US$2-
$3bn in downstream cost synergies, +US$125m per annum in opex savings, and less
tangible but important optimisation of field phasing and schedule acceleration.
Healthy earnings
Despite the reduced realised oil/condensate and LNG/gas prices during the year, OSH
still maintained a strong underlying EBITDAX margin of 69% during the year. The CY16
result was broadly in line with expectations, with revenue of US$1,236m (vs Morgans
US$1,285m), EBITDAX of US$852m (vs Morgans US$863m), and underlying NPAT of
US$106.7m (vs Morgans US$100.6m).
OSH continues to steadily pay down its PNG
LNG debt facility, with net debt finishing the year at US$3.1bn.
Conviction growing
OSH holds more economically viable growth at spot prices than its Australian large-cap
energy peers combined. Despite this, growth still represents just ~20% of our valuation.
While our optimistic oil price forecast drives a supportive valuation on OSH (share price target for clients only),
we believe further upside risk to our numbers exists from the potential for OSH to de-risk
its global scale organic growth portfolio of brownfield and greenfield assets.
We maintain
our Add recommendation. The key risk remains oil price and sovereign risk.
More information
Morgans clients can login to view our detailed report and share price target for Oil Search (OSH). Alternatively, please contact your nearest Morgans office for access.
Disclaimer: Analyst owns shares.
The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.