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Fat Prophets Hot Stock - Oil Search (OSH)

Friday 28th October 2016

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What’s new?

 

With the release of its third quarter operational result to 30 September 2016, Oil Search revealed that it has picked up the pace as it heads into the final quarter for 2016, with production on a barrel of oil equivalent (boe) basis rising 2.8% on the corresponding quarter in 2015, to 7.63 million boe.

 

The better boe performance was driven by a pick-up across two of the company’s product offerings, with one of its key products in liquid natural gas (LNG) printing a solid performances for the quarter accompanied by a condensate cameo. The other key product in oil, reported a softer performance for the quarter.

 

Oil production was disappointingly lower for the September quarter, especially as it carries a higher unit revenue value, following the printing of a 13.4% fall compared to the September quarter 2016, to 1.2 million barrels. In contrast, LNG production came in at a record 25,864 million square cubic feet, which represents a 7.3% rise on the same quarter in 2015.

 

However, the better operational performance for the quarter was fully offset by weaker prices for the energy complex. The average realised prices for both oil and LNG fell for the September quarter 2016. Compared to the same quarter for 2015, the oil price retreated by 13%, to US$47.24 a barrel, while LNG fell by 34%, to US$6.44 per million British Thermal unit.

 

Consequently, reported revenue unfortunately fell in the September quarter by 18.3% when compared to the corresponding quarter in 2015, to US$309.5 million. Despite this, Oil Search was still able to report an improvement in its capital position, with net debt falling to US$3.1 billion from US$3.4 billion from a year earlier on the back of a higher net cash position.

 

Outlook

 

Despite the better operational performance for the third quarter, Oil Search maintained 2016 production guidance to be in the range of 28 million to 30 million boe, while production cost guidance remains unchanged at US$8.00 to US$10.00 per boe, with other costs forecast to be in the range of US$135 million to US$155 million.

 

In terms of pricing, our expectation for the energy complex remains positive over the medium to long-term, with natural gas and its LNG derivative in high demand. This demand, we believe, is driven by the growing sea change in public opinion against carbon emissions.

 

We do however see some price volatility in the near-term as a surplus of crude supply continues to direct market sentiment. That said, supply constraints are in the offing with OPEC and Russia sounding noises about production cuts. Against the supply headwind crude demand in the United States and in China, the two largest consuming nations of crude product, remains robust and should act as a tailwind against any major oil price weakness.

 

Price

 

From a technical standpoint, we note that Oil Search’s share price has respected support at the 61.8% Fibonacci retracement of $5.60, which is bullish. The recent break above the 50-week moving average (red) of $7.01 is indicative of a strengthening in upward momentum. For this reason, a continuation of the current advance towards the 200-week moving average of $7.80 is now likely over the medium-term. 

 

Worth buying?

 

Our primary interest in Oil Search is the value represented in its PNG LNG operations, which are now worked into the company’s operational results and its financials. We believe the 30-year plus life of the facility underpins the long-term value Oil Search has the potential to generate, with limited risks of dilution given the company’s ability to fund its ongoing exploration and development activities from existing cash flows.

 

On this basis, we view the recent weakness in LNG prices and the impact this has had on the share price, as a buying opportunity.  

 

David Lennox is a senior analyst at investment research and funds management house Fat Prophets.  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 portfolios.

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