Oil Search

After years of relative stability, political problems have again surfaced in Papua New Guinea (PNG). The PNG Supreme Court has ruled that the Prime Minister, Peter O’Neill, was illegally anointed and reinstated his predecessor, Sir Michael Somare. Discontent and confusion now rule. Reports claim heavily armed police from each side patrol the streets of Port Moresby.

Having spent time working in PNG, your analyst has long worried about security there. Miners tempted by the incredible mineral wealth of the country have received scant attention from us with one exception; Oil Search. In Oil Search: PNG or bust on 01 Dec 09 (Speculative Buy - $5.87), we argued that although there was substantial risk, Oil Search was capable of dealing with it. The share price has risen 9% since then, but the latest instability is a reminder of the risk involved.

As the Government's reach barely extends beyond the capital, the latest instability shouldn't affect progress at Oil Search's PNG LNG project too much. Construction is on track for first production in 2014. Over 100m tonnes of steel has been erected in the Highlands, and onshore and offshore pipelines continue to be laid and welded. The only operational hiccup has been a US$700m increase in the capital cost due to the appreciating Australian dollar. The US$15.7bn venture, when complete, will be the highest margin new LNG project in the region, and increase Oil Search’s output by fivefold. Despite the risks, the potential profitability remains enticing. The share price is up slightly since 25 Aug 11 (Hold - $6.25) and we’re sticking with HOLD.