Gassed Up

In the same week the oil and gas sector received its biggest shake-up in years, Oil Search, one of the leading forces in the oil and gas market, has confirmed its status as one as one of the brightest new stars in the commodity sector.

Oil Search is a pivotal player in everything that's driving Australia's surging oil and gas market. Apart from enjoying the benefits of improved prices for oil and gas, it is a leading partner in the consortium planning to build a $6 billion energy pipeline from Papua New Guinea to Australia. Another members of the consortium is Alinta, the ambitious $3 billion West Australian gas company.

Earlier this week Alinta launched an audacious $9 billion takeover offer for the market's biggest energy group, the $9 billion Australian Gas and Light (AGL).

With the gas market literally “in play”, Botten could not have picked a better time to demonstrate his market power. Oil Search's bumper profit results, an 87% increase in full year profits '” from $US107 million to $US200 million '” spells out the latent potential of this long-established company.

After 70 generally fruitless years, Oil Search has emerged this decade as one of the stockmarket’s brightest stars, with a net profit compound annual growth rate of 102% over the past four years and a top 10 finish in the ASX 150 for total shareholder returns for each of the past three years.

For investors, Oil Search has been an unlikely success. Four years ago the company was having trouble persuading investors an Australian company could overcome the many difficulties of making money in PNG, difficulties that have held back rival companies such as gold company Lihir.

Moreover, back in 2003, the Oil Search share price was also struggling after AGL pulled out of a deal to buy gas from PNG. Today AGL is set to become the biggest customer for gas from the pipeline and Oil Search investors are sitting on a four-fold return on their shares.

And the really good news is that there is more to come. Oil Search is cash-rich and debt free; its diversification into the Middle East is going nicely; the long-awaited PNG–Queensland gas pipeline is on track; and in the meantime oil production is rising this year to 60,000 barrels a day.

There were plenty of impressive numbers and charts thrown around for the analysts at Oil Search's results presentation, but the one I found perhaps the most impressive and telling was a graph plotting Oil Search’s lost-time injuries over the past eight years. From 2000 on, there has been a dramatic fall in the injury rate to just 0.29 per one million worker hours. That compares with the Australian petroleum exploration and production industry average of 1.9.

As you can see in the accompanying video, even that low level is too high for Botten, but it is a most remarkable achievement given the PNG conditions Oil Search calls home. It may be an insight into the sort of thinking and planning that has made Botten such a successful CEO.

The skills learned in Papua New Guinea are proving useful in the Middle East as well. The countryside of Yemen, Egypt and Libya doesn’t look much like PNG’s jungle-clad mountains, but landowner and development issues are very similar. In the longer audio interview and full transcript, you’ll hear that coming from PNG can be a good thing while knocking doors around the Middle East at present.

It is the PNG gas pipeline project, though, that remains Oil Search’s top priority: the chance to finally realise the commercial potential of its gas reserves. With Santos still undertaking due diligence on following AGL into the project, financial close is promised by the end of this year with the first gas scheduled to flow from PNG to Queensland in 2009. Already it seems the pipeline will have to be able to handle higher volumes than previously envisaged.

Of course there’s the question mark over AGL’s future given Alinta’s attention, but Peter Botten says whatever happens there makes no difference to Oil Search. The value of the company’s resources means whoever controls AGL will want to make the most of them.

And whoever controls AGL will no doubt be glad to have Botten in charge of Oil Search. For everything you want to know about Oil Search, check out today's video, hear the extended audio or read the transcript of the interview.