Australia | Apr 23 2008
By Chris Shaw
The company’s March quarter production result showed Oil Search ((OSH)) was unable to capitalise on record oil prices in delivering a slightly below expectations result but brokers remain generally positive as the real story continues to be the potential development of the group’s interest in the Papua New Guinea LNG project.
Group production for the three months to the end of March was down 11% year-on-year and sales volumes were down 30%, though as Merrill Lynch points out much of this was due to difficulty in finding ships to transport its production.
Factoring in the result has lead the broker to trim its full year production forecasts even though management has not yet revised guidance. Despite this, Merrill Lynch’s valuation has actually increased on the back of lower forecast capital expenditure.
Citi has also lowered its estimates slightly on the back of the report, but unlike Merrill Lynch it rates the stock as a Hold rather than a Buy as it continues to have concerns over the company’s ability to raise its share of the development costs for the LNG project.
It suggests while the company has done a good job in preserving cash higher costs will make this a greater challenge going forward, especially in a high oil price environment. Citi estimates the company could need as much as $3.7 billion in funding for its share of the PNG project, meaning a mix of debt and equity is likely to be required.
Credit Suisse points out while the latest production report suggests certain issues are of some concern as there is some risk they flow through into production estimates in future years this should be outweighed by the upside as the company moves closer to a FEED (Front End Engineering and Design) decision in coming weeks, meaning the shares should enjoy a re-rating.
JP Morgan agrees, noting while the production result was lower than expected the lower sales were largely a shipment timing issue (as pointed out above), meaning no major changes to full year estimates are required. It also means no major changes to the broker’s valuation of $6.22, which supports its Buy rating.
The FNArena database shows the stock is rated as Buy seven times, Hold twice and Sell once, unchanged from prior to the quarterly report. The average price target is $5.64, Credit Suisse leading the way with a $7.00 target and ABN Amro the low marker with a target of $3.80.
Shares in Oil Search today are unchanged at $4.96 despite a stronger overall market.