Oil Search: Interim result 2013
Recommendation
Half-year results from Oil Search were a humdrum affair. Production fell 2% to 3.2m barrels of oil equivalent (mmboe) and less exploration activity drove a 6% improvement in net profit to US$114m. From earnings per share of US$0.085, a US$0.02 interim dividend was declared, unfranked and unchanged from last year (ex date 6 Sep).
The result played second fiddle to progress at the giant Papua New Guinea LNG project, in which Oil Search is a 29% partner. With 10,000 workers on site, the project is now 90% complete and will produce first gas next year. When it does, Oil Search’s production will rise fivefold. As chief executive Peter Botten exclaimed during the results presentation: 'You can almost smell the oil now'.
Attention is now shifting towards expanding the project to a third and possibly fourth LNG train (processing facility).
Key Points
- PNG LNG now 90% complete
- Project expansion highly likely
- Successful exploration outside PNG
Oil Search already appears to have enough gas for a third train, but agreements with the joint venture are needed before this can be approved. Even the bedlam of PNG has been restrained recently. The joint venture is no doubt happy to be complaining about labour costs and skills shortages rather than tribal warfare and sabotage.
Iraq incursion
Outside of PNG, the company had some exploration success. In particular, Taza, a high-risk well in Iraq, has struck oil and early indications suggest it could hold between 75-250m barrels of oil. It is, in other words, big. Taza is currently being tested for commerciality but could be producing oil in a few years. This does nothing to reduce Oil Search’s political risk exposure even if it does increase reserves and output.
Half-year to 30 June | 2013 | 2012 | /(-) (%) |
---|---|---|---|
Production (mmboe) | 3.19 | 2.26 | (2) |
NPAT (US$m) | 114 | 108 | 6 |
EPS (US cents) | 8.5 | 8.1 | 5 |
Dividend (US cents) | 2 | 2 | 0 |
Yield (%) | 0.5 | 0.5 | n/a |
Franking (%) | 0 | 0 | n/a |
Political risk remains the chief concern for the business, especially in PNG, where violence can erupt indiscriminately. An investment in Oil Search is not for everyone but it is no mere punt: PNG LNG will generate the best returns from any LNG project anywhere and Oil Search will soon have enormous cash flows to spend. Dividends are likely to climb in the years ahead.
We’ve previously estimated that the company is worth about $9 a share with an upside to $14 a share (see Oil Search: to PNG or bust). We’re increasing the prices in our recommendation guide to reflect expansion potential and the fact that production is a mere year away. But, with the stock up 12% since 27 Feb 13 (Hold – $7.43), the upside is too little for an upgrade at the moment given the risks. HOLD.