Expansion Plans The Catalyst For Oil Search

Australia | Apr 20 2017

Expansion plans for PNG LNG remain uppermost in broker views on Oil Search, with several catalysts expected later in the year.

-Binding commercial agreements on preferred development concepts expected at end 2017
-Stock seen trading in a tight range until expansion plans are more concrete
-PNG election may cause some volatility in the share price


By Eva Brocklehurst

Expansion plans for PNG LNG remain uppermost in broker views on Oil Search ((OSH)), with several catalysts expected later in the year. The company delivered another strong quarter of operations in March, with PNG LNG running at around 8.3mtpa and production just short of the December quarter, at 7.57mmboe. The headline revenue of US$344m disappointed brokers but this was largely explained by the timing of shipments.

Brokers were also disappointed by the deepened Antelope-7 target, which proved unsuccessful. Citi points out that this should not affect the expansion outlook because others such as Antelope, P'nyang and Muruk should already be able to support three trains in time.

Production guidance has been maintained at 28.5-30.5mmboe for the year. UBS anticipates sales over 1-3 years for incremental volumes of 1.3mtpa being marketed by Exxon and, whilst this will likely be at prices below existing contracts, expects this will reduce exposure to weak spot LNG markets over the next few years.


The company has confirmed development of the Elk-Antelope fields should occur in conjunction with the P'nyang gas field and utilise the existing PNG downstream infrastructure. Binding commercial agreements on a preferred development concept are expected by the end of the year.

Confirmation that discussions have commenced between all relevant JV partners is a step in the right direction, Credit Suisse believes. A final investment decision is slated for late in 2018 or early 2019. The broker assumes two 4mtpa trains will deliver first gas in 2023, but acknowledges that assumptions around train size and the company's ultimate equity share, as well as total capital expenditure, remain very much a best guess.

Goldman Sachs observes the joint venture's 2017/18 drilling campaign addresses significant value potential in what is a low-cost LNG province. The broker, not one of the eight brokers monitored daily on the FNArena database, maintains a Buy rating on Oil Search with a $7.75 target.


Morgan Stanley considers the long-term growth story intact but, while there is upside in absolute terms, questions whether the company will outperform its peers in the near term until expansion plans are more concrete. A number of obstacles are required to be surmounted including the upcoming PNG elections, as well as an agreement on the path forward among the JV partners and commercial terms with the government, and further appraisal drilling.

Aside from the oil price, the major risk brokers envisage for the current year appear to be with the election in PNG. Traditionally, Credit Suisse observes, elections have caused some volatility in the company's share price. Later in the year more detail on expansion plans and costs are expected. The stock remains the broker's preferred way to play the large cap E&P sector.

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