Oil Search

It was a difficult year in Papua New Guinea. Landslides, local disputes and an ongoing political crisis all caused concern, but you wouldn’t know it from Oil Search’s results. Revenue for the year rose 26% to US$733m, driving earnings before interest, tax, depreciation, amortisation and exploration (EBITDAX) 26% higher to US$596m. From earnings per share of US$0.18, up 62%, a US$0.02 dividend was declared (ex-date 8 Mar), taking full year dividends to US$0.04.

More than 14,000 people are working just outside the capital, Port Moresby, on building the giant PNG LNG processing facility from scratch. Airstrips, hundreds of kilometres of pipelines, power facilities and gas condensers are all being assembled, stretching PNG infrastructure to the limit. More than 10,000 truckloads of goods are being sent up the notorious Highlands Highway, which your analyst can confirm is atrocious. This is an epic undertaking that will alone double the size of the PNG economy. So far, progress has been on schedule despite serious hurdles thrown in the way from nature and politicians.

With a massive production boost soon to be realised, it’s somewhat surprising that Oil Search has elected to increase exploration expenditure from US$145m last year to more than US$250m this year. It’s an indication that the hunt for resources to feed further expansion is on. We already estimate very healthy returns on capital from the existing two train development. Including a third train may see returns on capital as high as 30%. By early next year we will know if there's enough gas to fulfil the company’s ambitions, but there are plenty of ways to feed an additional train. PNG holds a lot of gas but demands little of it. PNG LNG is a logical outlet for gas regardless of who finds it so the odds of a third train going ahead are high.

We’re impressed with the progress made at PNG LNG but, with the share price rising 7% since 03 Feb 12 (Hold - $6.53), so are others. We’d upgrade the stock if it became cheaper but, for now, we recommend you HOLD.