Oil Search: Tackling new key hurdles

About the author:

Author name:

By Adrian Prendergast

Job title:

Senior Analyst

Date posted:

23 October 2019, 4:13 PM

Sectors Covered:

Mining, Energy

• A steady 3Q, with stable LNG and weaker liquids volumes (already flagged).
• A new key hurdle for the PNG expansion, P'nyang Gas Agreement talks underway.
• Alaska development gathering pace, while a partial interest sell-down would lower capex requirement and risk profile for OSH.
• Maintain Add rating, trading at an attractive discount to our target price (Morgans clients can login to view detailed reports and price targets).

3Q19 recap

OSH posted a steady third quarter, with LNG volumes stable and lower liquids sales bringing group production to 6.81mmboe (vs Morgans 6.93mmboe), 10% lower than the same period last year.

The performance of PNG LNG T1 & T2 was closer to our estimate at 6.24mmboe (vs Morgans 6.36mmboe), while output from OSH-operated oil fields was 28% lower on the previous quarter at 302mboe (vs Morgans 296mboe).

The lower liquids volumes were already flagged to the market, with damage to mooring chains at the offshore liquids loading facility previously reported. This contributed to group sales volumes of 6.47mmboe, 4% lower on the previous quarter (vs Morgans 6.86mmboe).

Average realised LNG price for 3Q was US$9.44/mmbtu (vs Morgans US$9.62/mmbtu) marginally higher on 2Q, while posting an average realised oil/condensate price in 3Q of US$59.54/bbl (vs Morgans US$61.75bbl), 13% below 2Q.

As a result OSH reported sales revenue of US$361m (vs Morgans US$383m).

Guidance trimmed

Updating full year 2019 guidance to include the lost 3Q volumes, OSH cut overall production guidance by 5% to 27-29mmboe (from 28-31mmboe).

Accordingly unit production costs were revised up to US$12-13/boe (from US$11-12/boe) reflecting the lower production base, repair costs and lower insurance receipts than anticipated.

PNG expansion at new critical point

With the PNG government recently announcing it would stand by the binding Papua Gas Agreement (signed in early 2019 by the previous government), negotiations around the P'nyang Gas Agreement have resumed.

Both agreements are needed for the three-train PNG expansion to proceed into FEED (front-end engineering & design), so the joint ventures are not yet 'out of the woods'.

There is justifiable concern that the issues experienced will lead to material (multi-year) delays.

Our view is that all parties appear motivated (economically and through recent actions) to keep the brownfield projects moving forward into timely development.

This presents the P'nyang Gas Agreement as another important catalyst.

Maintain Add recommendation

Adjusting our numbers for the 3Q result and flushing through updated oil price forecasts for 2019/2020, has seen our target price has reduced (Morgans clients can login to view detailed reports and price targets).

Still trading at a discount to our target, we maintain our Add rating on OSH.

In terms of other upcoming catalysts, OSH will drill three wells over the next six months (during 4Q19 & 1Q20), one at Gobe in PNG and two in Alaska (one in the Pikka Unit and one in the Horseshoe Block).

OSH expects the Pikka Unit to reach FID (final investment decision) by mid-2020 before which the company intends to sell down 15% of its stake in the Alaskan operations (lowering it from 51% to 36%).

The key risk to our call is oil price and political risk.

More information

Morgans clients can login to view our detailed report and updated share price target for Oil Search (OSH). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

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