Oil Search: Result 2012
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With Oil Search on the brink of spectacular production growth from the Papua New Guinea LNG (PNG LNG) project, annual results from the existing business appear almost petty. Production dipped 5% to 6.4m barrels of oil equivalent (mmboe), generating revenue of US$725m, down 1% from last year. Reported net profit fell 13% to US$176m although results both last year and this year were muddied by minor impairment charges. On an underlying basis, net profit fell 35% to US$153m.
| 2012 | 2011 | Change (%) | |
|---|---|---|---|
| Production (mmboe) | 6.4 | 6.7 | -5 |
| Revenue (US$m) | 724.6 | 732.9 | -1 |
| EBITDAX (US$m) | 524.3 | 585.6 | -10 |
| Underlying net profit (US$m) | 153.0 | 235.7 | -35 |
| Underlying EPS (USc) | 11.5 | 17.9 | -36 |
From underlying earnings per share of US$0.11, down 36%, a final dividend of US$0.02 was declared, taking full year dividends to US$0.04 (ex date 7 March).
The PNG LNG project is now 75% complete and, despite a US$1.5bn cost blowout, is on track to deliver exceptional returns on capital. Oil Search has taken out a US$500m debt facility to fund its share of higher costs and the company sits on a US$450m cash pile so there is no concern about funding.
Exploration expenditure continues to be surprisingly high – Oil Search spent US$240m on exploration last year, almost 80% of that in PNG – suggesting the company is keen to expand PNG LNG even further. Those ambitions have received a boost from the discovery of a new gas field, P’nyang, that will help underpin a third production facility (or train) to the existing project. A third train will make the economics of the project even more attractive and will provide another boost to output. Oil Search isn’t close to reaching the limits of its gas resource yet and PNG LNG could grow larger still.
The share price is up 28% since our original buy recommendation in Oil Search: To PNG or bust (Speculative Buy – $5.87) from 01 Dec 09 and the upside remains seductive; PNG LNG is still probably worth around $9 a share to Oil Search. As ever, political risk in PNG is the main concern. No business has a better track record than Oil Search in this chaotic region where sporadic outbursts of violence can spook investors. Shareholders should expect a volatile ride.
The share price has risen 6% since 13 Nov 12 (Hold – $7.06) and we still await a chance to upgrade at cheaper prices. For now, HOLD.
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