Oil Search: Increasing confidence in PNG

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
25 August 2021, 11:00 AM
Sectors Covered:
Mining, Energy

  • An inline 1H21 result from OSH has kept our focus on the merger with STO and progress of growth projects in PNG.
  • Amendments to Oil & Gas Act in PNG increase our confidence in political risk, with the government more supportive of investment.
  • Little new news on STO merger with mutual due diligence process progressing. EBITDAX US$489m (vs MorgansF US$493m), NPAT US$139m (vs MorgansF US$137m).
  • Maintain ADD rating, with a (login to view).

1H21 result

A clean 1H21 result, with earnings inline with expectations and no surprises.

1H21 underlying EBITDAX of US$489m (vs MorgansF US$493m) +8% yoy and NPAT of US$139m (vs MorgansF US$137m) were both inline. A large percentage increase in earnings, albeit coming off a low base in 1H20 near breakeven. Interim dividend of USD 3.3ps.

Gearing edged lower in the half to 27% at the end of June, on set principal repayments of the PNG LNG project finance facility.

Guidance maintained, 2021 production 25.5-28.5mmboe (MorgansF 27.8mmboe). Unit production costs in the first half averaged US$10.63/boe, leaving it on track for full year guidance of US$10.50-$11.50/boe (MorgansF US$10.8/boe).

No new news on Alaska. Once the merger agreement between STO/OSH is signed we expect the two sides to coordinate efforts to selldown and finance Alaska. OSH again confirmed it had no hard internal deadlines for its progress in Alaska, with the current stage in our view likely to extend into 2022.

Mutual due diligence is continuing on the proposed merger with STO. We expect more detail and further updates within the next month.

Increasing confidence in PNG risk

Late last week the PNG government passed an amendment to the Oil & Gas Act 1998. Pleasingly, the changes to the act align PNG regulations with those reached in the Papua gas agreement.

This increases our confidence that the PNG government will not seek to establish oppressive fiscal terms. The economic fallout from COVID, and threat of the Exxon and Total growth projects stalling, was likely a key motivator for the government to reflect on its initial hard stance towards the oil & gas industry.

As a result of the lower political risk, and progression through FEED, we have lifted our risk weighting on our Papua LNG valuation from 25% to 50%.

Forecast and valuation update

We have updated our 2021 estimates for the 1H21 result, increased the risk weighting on Papua LNG to 50%, and rolled our model forward. ▪ Net of these changes our target price is slightly lower at (login to view).

Investment view

We maintain our ADD rating on OSH, with a revised (login to view). We view OSH as undervalued in its own right, while a merger with STO would in our view unlock greater upside for the combined entity.

Price catalysts

Merger agreement signing. 

3Q21 production result. 

Alaska equity selldown.


Key risks to our ADD call are COVID related (regional/global energy demand), oil price risk, and country risk.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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