How long have you held Oil Search?
We initiated our position in December 2010. We then topped up in 2011 and 2012 in advance of outperformance on its PNG oil operations, and more importantly as the PNG-LNG project derisking milestones were being achieved.
What do you like about it?
We like Oil Search for upcoming delivery of the $19 billion world-class, long-life, and nearly fully contracted PNG-LNG processing trains T1 & T2 development, by its operating JV partner Exxon.
Oil Search management is guiding a fivefold lift in operating cashflow from onshore PNG-LNG, with first saleable cargo targeted early 2H 2014, and full production in 2015.
Furthermore, it is pleasingly balanced with exciting, but riskier, exploration in onshore Kurdistan and offshore Gulf of Papua with its other JV partner Total.
But of greater importance is the exploration and appraisal program taking place around its LNG project, and existing oil operations in PNG. We see potential for incremental cashflow expansion.
Another important anecdote is that the PNG government is very supportive of PNG-LNG given its significant contribution to GDP. The government seems to be very pragmatic and considers it better for future oil and gas development activities to be potentially consolidated and integrated into PNG-LNG.
How is it better than its competitors?
It stands out amongst the pack with a targeted fivefold lift in operating cashflow of $1.3 billion to $1.5 billion, and a 40%-50% net profit after tax (NPAT) payout ratio in 2015.
Return to shareholders is reasonable, even with the range of growth options available in the kitty. Furthermore, we see potential for these other opportunities to be progressively commercialised over the longer term. Its ASX listed oil and gas peers fail to compete on these metrics of commerciality, and globally it’s one of the sector’s best.
What do you like about its management?
Despite Exxon becoming an operator of the PNG-LNG development in more recent times, Oil Search management have played a large part in community, health and environmental aspects of successfully operating in the PNG Highlands over their greater than 80 years in the country.
The social licence to operate in another country’s backyard is sometimes ignored, but we see management have been very successful in paying due attention to this area. It is also regarded by OXFAM’s Publish What You Pay as a “stand-out company”, being one of the very few ASX-listed entities to have adopted Extractive Industry Transparency Initiative (EITI) disclosure, despite it not being a requirement.
What is your target price on Oil Search?
Our target price is over $11.00 a share. However, it has the opportunity to be refreshed from the inferred value of the various PNG transactions (including Interoil tenements and HZN farm-down) to be potentially announced in the very near term. In the longer term, a final investment decision (FID) on further PNG-LNG processing trains could push out our target further.
At what point would you sell it?
We would consider selling in the event of a big downgrade in PNG-LNG production and consequential escalation in the extremely competitive operating cost base of $10-12/BOE (barrel of oil equivalent) targeted.
We see downgrade risk as low probability. Furthermore, we see the PNG-LNG project delivery is largely derisked, with around 15% left as at end April 2013. It is pleasing that gas pipeline commissioning is scheduled to commence in 2H 2013, providing ample time to iron out any issues.
A further sell event trigger from a growth perspective is if the exploration and appraisal program taking place around PNG-LNG project isn’t big enough to justify further incremental capex for processing trains T3 (most likely) and T4 (if further discovery upside and global LNG demand allows).
How much has it added (subtracted) to your overall portfolio over the last 12 months?
Detracted 26 basis points performance over past 12 months.
Is it a liquid stock?
Liquidity in the stock is fairly good, with an average of 15 million shares traded per week in the last 12 months.
Is there anything else you would like to say about Oil Search?
Last, and by no means least, around 10% of sales volume (total sales volume of 6.9Mtpa guided) is uncontracted from PNG-LNG, and also an earlier start date is now targeted relative to the formal contract. There is therefore significant opportunity for leverage to spot market sales. The formal contract start date is end 2014 for 6.2Mtpa, but first cargo sale is anticipated for early 2H 2014, providing a six-month window of opportunity for early sales. Both opportunities work in very well with the limited supply available on the spot market.
By Anna Kassianos
Anna is senior energy and resources analyst at Platypus Asset Management. She has over a decade’s experience in the financial and resources industry where she has held a number of roles including senior resources analyst on the sell side, corporate development analyst and process engineer in mining and oil companies.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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