Oil Search's SPP
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Oil Search's share purchase plan is almost complete with applications due by 5pm on May 9. Shareholders can purchase up to $15,000 worth of shares at $8.20, a 7% discount to the current price.
The PNG LNG project will start production later this year and will transform the business; production will increase fivefold and revenues will soar, making today's valuation appear reasonable. There is enough gas to expand the project to a third processing facility, further lifting production. Oil Search will use the proceeds of the SPP to buy a 23% stake in InterOil's controversial Elk/Antelope gas fields for US$900m upfront. Gas from those fields could be used in further LNG expansions so there is a strong case for increasing your holding today.
Yet the concerns that have worried us since we first recommended the stock (see Oil Search: PNG or bust (Speculative Buy - $5.87)) plague it today. PNG has been a graveyard for so many projects because operating there is hard. Instability and violence are ever-present risks that today's price does not consider.
With the current share price above the SPP price, investors could sell part of their holding and apply for an equivalent parcel of shares via the SPP to lock in a small profit. There is a risk, however, that a scale back will limit the number of shares available. Our guess is that a scale back is likely. Oil Search remains on our watchlist and we'd be tempted to upgrade if short term woes emerge. We don't recommend increasing your stake at current prices and, even though forgoing the SPP will incur dilution, we're sticking with HOLD.
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