Oil Search: Interim result 2017

PNG LNG remains one of the best LNG projects anywhere and it could get bigger again.

Oil prices may have dented enthusiasm for Oil Search’s PNG LNG project but this remains a tremendously profitable project, as the company's interim results show.

Production rose to 30m barrels of oil equivalent (mmboe) and higher volumes helped reduce unit production costs to just US$8.50 per barrel of oil equivalent (boe). This is 30% lower than it was in 2014.

Table 1: OSH Interim result 2017
Six months to Dec 2016 2015 /(–)
Revenue ($USm) 1,236 1,586 (22)
Volume (mmboe) 30 28 7
Core profit ($USm) 107 360 (70)
Dividend (cents) 3.5 10 (65)
Cash flow ($USm) 551 952 (42)
Net debt ($USm) 3,076 3,318 (7)

Lower costs and higher output raised profit to almost US$90m for the period. PNG LNG boasts some of the best LNG economics in the world with cheap production costs and low cash outflows.

Its energy-rich gas attracts strong prices and the project can repay debt and meet capital expenditure requirements at just US$28 a barrel, far less than its Queensland LNG peers.

Higher volumes, however, could not offset a 22% decline in prices and operating cash flow of US$555m was more than 40% lower than last year – although still enough to lower debt to US$3bn.

With the first two trains at PNG LNG operating successfully, attention is now turning towards a possible expansion of the facility. To do that the joint venture needs to find more gas.

One possible source may be from fields further south which the joint venture can access. Another option is a recent gas discovery by Oil Search known as Muruk which is closer to existing infrastructure.

Combined, these new gas sources could potentially fill two additional trains to generate higher returns from existing infrastructure. This is still some way off and there is plenty of work to do, but Oil Search could materially expand output from the project at a cost of US$2–3bn.

The greatest risk remains PNG itself which appears even less stable than it did last year. This risk is hard to quantify and means you should keep your portfolio weighting low. The stock is up 9% since we upgraded to Buy last June in the aftermath of Brexit and in line with the price at which we subsequently downgraded back to Hold and we continue to recommend that you HOLD