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Oil Search

Fat Prophets

Friday 4th September 2015

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Oil Search (OSH.ASX)

Fat Prophets: A half-year delight

 

What’s new?

“What oil price crisis” is the response by Oil Search following the release of its first half result to 30 June 2015, and in passing the result was the cream of the crop for the current reporting season. The company reported significant improvements in its half year numbers, as operations completely swamped the impact of weaker realised energy prices. Despite the capital draining development activities, the balance sheet remains very robust. Shareholders were also rewarded with a rise in the interim dividend.

Reported revenue for the half was US$863.8 million, which was 69.4% higher than for the corresponding 2014 half. The primary driver behind the significant rise was higher operational volumes, while materially lower average realised energy prices partially offset the positive volumes impact. In brief, there was a 205% increase in barrels of oil equivalent (boe) production compared to the first half 2014, to a record 14.32 million boe.

As a result of the fall in unit costs, and despite the weaker average realised energy prices, the company experienced only a moderate fall in its cash margin. For the reported half its cash margin fell to 75% from the 77% achieved in the same half for 2014.

Reported Net Profit after Tax (NPAT) for the first half was 49.2% higher compared to the same half in 2014, at a record US$227.5 million. In combination with higher production volumes, the other key driver of Oil Search’s 1H15 results was the 42.5% decline in unit costs to US$8.90 per boe. Unit costs not only benefited from higher volumes, but also from cost saving initiatives.

Shareholders were rewarded following the excellent first half result with the declaration of a higher interim dividend. The Board declared a US6 cent interim dividend for the first half 2015, which was US4 cents higher on the 2014 interim dividend.

 

Importantly, the resounding operational performance for the half had a positive impacted on net operating cash flow. The company’s operations threw-off net cash of US$516.8 million, which represents a rise of 102% on the same half for 2014. The availability of additional LNG from the company’s new Papua New Guinea facility (PNG LNG, Oil Search’s interest 29%) was a key driver of the 115% increase in net receipts on the same half in 2014, to US$638.6 million.

The call on development capital as PNG LNG progressed through its construction phase is now behind the company. Capital expenditure for the first half amounted to only US$301 million which compares very favorably with the US$1.4 billion for the same half in 2014. This, in combination with the increase in cash flow underpinned the decline in net debt to 30 June 2015 from US$3.8 billion to US$3.4 billion.

Outlook

There is no doubt the commencement of production of LNG from PNG LNG has had a profound impact on the company. Fat Prophet’s expect the full year result will display a similar trait. In terms of company guidance for the balance of 2015, production remains unchanged at 27 million to 29 million boe, production costs are expected to be in the range US$9 to US$11 per boe, and capital expenditure is expected to be in the range US$610 million to US$690 million.    

Price

From a technical perspective, the weight of the declining oil price has pushed Oil Search below support at $6.80. However, with current levels looking stretched relative to the 50-day moving average and with the RSI nearly neutral, Fat Prophet’s envision some consolidation emerging around a new level of support at $5.45.

Worth buying?

Fat Prophet’s primary interest in Oil Search is the value represented by its PNG LNG facility. We believe the 30-year plus life of the facility will underpin the long-term value that this company has the potential to generate, by funding future exploration and new development activities. Additionally, blue sky potential to expand the PNG LNG facility through the exploration of offshore PNG, which is a region with an excellent energy pedigree, can only add further value.

 

David Lennox is a Senior Analyst at Fat Prophets share market research. To receive a recent Fat Prophets Report, CLICK HERE.

Disclosure: Oil Search is held within the Fat Prophets Mining and Resources, Concentrated Australian Share and Global Opportunities models.

 

 

 

 



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