PNG growth refined
Confirming our long-term belief, Oil Search (OSH) confirmed that a 3-train expansion of its PNG LNG operations was now the new base case that the respective joint ventures are working to. This entails a 2-train operation supported by the Elk-Antelope reserve base (ownership wise referred to as Papua LNG T1 & T2), and a third new train supported by P'nyang (referred to formally as PNG LNG T3). In reality these trains will sit side-by-side within PNG LNG's established downstream infrastructure, leveraging off considerable existing facilities.
This presents a clearer ownership structure where each involved party retains their upstream equity interest without having to blend or unitise interests across the related joint ventures. While positive, this is progressing slower than forecast with PNG government approval now not expected until later this year (previously Jan '18).
Smaller scale, less capex, higher return
What came as a surprise are the JV's plans for the three trains to be smaller in operational scale than the existing two at PNG LNG (with the three new trains to produce a combined (approximate) 8mtpa of LNG, versus the +9mtpa from PNG LNG T1 & T2). Given the early stage Oil Search would not be drawn into giving detail, other than to say this three small train concept was unanimously agreed by the JV's as the highest return option and that it involved using new LNG technologies for a lower capex outcome.
Steady 1H18 result
Underlying 1H18 NPAT of US$302m was in line with expectations, while group EBITDAX margin outpaced estimates. Oil Search declared a final dividend marginally above our estimate at USD 5.5 cps (vs Morgans est. USD 5.1 cps). Management continue to have confidence in the ability of its high quality asset base (and exceptional margins) to continue to accommodate elevated levels of gearing during development of trains 3-5 and Alaska.
Net debt finished the half at US$2,610m (gearing 33%), which we expect to decline short term until PNG development returns gearing to its previous highs.
We have updated our conceptual DCF's on the three train expansion to the smaller scale outlined, while still applying a risk adjustment (as a value contingency) to P'nyang. We still see a further update scenario from Muruk potentially displacing P'nyang as likely, making the results of Muruk-2 (spud in Q2, substantial step out) particularly interesting. Given the slower progression we have pushed back Papua LNG T1 & T2 to 2024. These changes have resulted in a decrease to our share price target (Morgans clients can login to view). The key risks for OSH are the oil price and sovereign risk.
We retain our Add recommendation.
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Disclaimer(s): Analyst owns shares.
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