Oil Search: Merger crunch time approaching

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
27 October 2021, 12:00 PM
Sectors Covered:
Mining, Energy

  • A good 3Q21 result from Oil Search (ASX:OSH), although already flagged by PNG LNG JV partner Santos (ASX:STO) who have already reported their own quarterly.
  • PNG LNG operated at an impressive 8.5mtpa in 3Q21, rebounding from maintenance activity the previous quarter.
  • While we see long-term value on a standalone basis for OSH, market focus in the short term is likely to remain fixed on the progress of the agreed merger with STO.
  • Key hurdles being OSH shareholder vote and PNG government approval.
  • Still trading at a discount to our standalone DCF, while we see an opportunity for the merged group to unlock further upside. We maintain our Add rating.


Oil Search (ASX:OSH) posted a solid 3Q21 operational and sales result, inline with Santos' (ASX:STO) already reported PNG LNG performance (averaging 8.5mtpa of LNG in 3Q21).

PNG LNG, combined with OSH’s legacy operated assets, combined for total 3Q21 production of 6.9mmboe (+5% qoq and +2% vs MorgE). While realised LNG price of US$10/mmbtu (+16% qoq and +5% vs MorgE).

This delivered 3Q21 sales revenue of US$409m (vs MorgE US$395m) was slightly ahead of our estimate.

OSH narrowed 2021 production guidance to 26-28mmboe (was 25.5-28.5mmboe). While timing of some work on Papua LNG will see lower-than-expected capex.

COVID has had a large impact on PNG, which has caused some hold up for Papua LNG pre-FEED work. The JV remains confident it can enter FEED in early 2022.

Pikka Phase 1 FEED work is progressing. As a standalone our key question remains around how easy it will be for OSH to source funding for Alaska, while in a merger scenario we see a reasonable probability STO will consider divestment.


A solid quarter for OSH with few surprises operationally, and benefitting from the strengthening price environment for oil and LNG prices.

The key focus remains on the progressing agreed merger with STO, although some hurdles remain. Namely: 1) OSH shareholder vote and 2) PNG government approval. Both have some risk around given mixed views on the deal metrics

Forecast and valuation update

We have only made minor adjustments post the 3Q21 result, with our target price (login to view).

Investment view

We have maintained our Add recommendation with a (login to view) target price.

While maintaining our Add rating, OSH’s share price is starting to make ground on our target while we are mindful of the short timeframe for the STO merger. Either way we see standalone value in OSH, but recognise that if the merger were not to proceed OSH share price would likely come under some short-term pressure.

Price catalysts

STO/OSH merger (expected year end timeframe).

Pikka development progress.

4Q21 operational result at PNG LNG.


Key short-term risk being focused on potential STO/OSH merger does not proceed.

COVID risk to regional and global energy demand (oil and LNG price drivers).

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Disclaimer: 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.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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