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.
Developments
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.
Catalysts
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.
RBC Capital Markets believes the status quo is likely to be maintained post a new PNG government being formed in August. This should be beneficial for Oil Search. The broker retains a Outperform recommendation, because of a well-defined growth outlook through low-cost LNG train expansions. RBC Capital Markets, not one of the eight monitored daily on the database, has a Outperform rating and $8.50 target.
Morgans expects upcoming catalysts will provide a chance for the share price to break out at its recent trading range of $6.50-7.50. The catalysts also include an estimate for the Muruk resource and finalisation of the co-operation agreement between PNG LNG and and Elk-Antelope.
Morgans expects a minimum of three additional LNG trains will be developed as brownfield projects at PNG LNG and the key risk going forward remains the oil price. Ord Minnett agrees that further detail on the size and cost of the expansion project could de-risk the project and re-rate the stock.
Muruk
The company is currently drilling a sidetrack on the Muruk-1 well and typically finding the structure more complex than originally anticipated. Morgans observes this could mean the drilling of Muruk-2 slips slightly, but the fact that Muruk is not expected to be part of a train three or four development means it does not affect valuation.
The database shows five Buy recommendations and three Hold. The consensus target is $8.05, suggesting 12.2% upside to the last share price. Targets range from $7.21 (Citi) to $10.22 (Morgans).
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