Oil Search: Enjoys recovery cycle
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 28 July 2021, 12:00 PM
- Sectors Covered:
- Mining, Energy
- A good quarter on balance from Oil Search (ASX:OSH), with recovering oil and Liquefied Natural Gas (LNG) prices overwhelming lower production.
- We await the 24 August result with interest to see if any change in confidence on Pikka development execution, beyond a slip in timing.
- Maintain ADD rating, still see long-term value upside on offer albeit with higher risk.
On balance a good 2Q21 result from Oil Search (ASX:OSH).
2Q21 group production of 6.59mmboe was -4% qoq, but in line with our forecast (6.6mmboe), on scheduled maintenance impacting PNG LNG volumes. Sales volumes performed better, flat on the quarter at 6.7mmboe (vs MorgE 6.6mmboe).
PNG LNG production was -5% qoq on the maintenance activities conducted by operator Exxon.
OSH-operated PNG legacy fields performed relatively well at 0.7mmboe (+5% qoq and +6% vs MorgE), although the beat is an immaterial benefit to group earnings.
Average realised prices were ahead of our estimates. Achieved LNG/gas price of US$8.61/mmbtu (vs MorgE US$8.31/mmbtu) and average oil/condensate price of US$71.55/bbl (vs MorgE US$67.08//bbl).
Stronger prices helped support solid 2Q21 revenue of US$366m, +21% qoq, that came in +10% ahead of our estimate.
Net debt continues to steadily track lower, -5% qoq, at US$2.1bn.
FY21 production and capex guidance was maintained. Slight increase in other operating costs from US$145-$165m to US$155-$175m, on higher royalty expenses resulting from rising sales revenue.
A steady performance from PNG LNG given the expected maintenance impact, while achieved prices were marginally ahead.
The solid uplift in 1H21 revenue, +49% on the previous half (2H20), supports a better FCF and dividend performance from OSH. We expect OSH to continue focusing on strengthening its balance sheet.
No news on Pikka, with OSH again flagging it would spend the time needed in farming down its interest and securing debt funding. As flagged to the market recently, we now expect this to occur in 2022.
Not altogether bad news as OSH’s growth profile stretching out to be longer dated will allow it to strengthen its balance sheet and avoid further dilution.
Forecast and valuation update
We have only made minor adjustments to our estimates post the 2Q21 result.
Our target price has been revised to (login to view).
We maintain an ADD rating on OSH, having recently upgraded our rating based on a long-term value call with OSH de-rating materially over the last 6 months.
The majority of OSH value is still driven by the two existing Exxon-operated LNG trains at PNG LNG (low risk).
OSH’s first half result on 24 August, in particular we are on the lookout for any change in OSH’s confidence in selling down its equity in Alaska and secure project finance.
New CEO appointment and any accompanying change in strategy.
Any further developments on proposed STO/OSH merger.
Political risk in PNG, with ongoing risk despite fiscal stability agreement signed on Papua LNG.
Oil/LNG price risk, in particular related to COVID-19 risks to energy demand.
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