Australia | Jun 23 2009
By Chris Shaw
With a number of liquified natural gas (LNG) projects in and around Australia being proposed at present any project that can sign offtake agreements has a distinct advantage as such deals assist in the obtaining of finance in what are multi-billion dollar developments.
This makes recent news from the Papua New Guinea LNG project particularly positive as the announcement by the project’s lead partner, ExxonMobil, of contracts with Asian buyers for another 4.3 million tonnes following a previous two million tonne agreement means the project’s forecast output is now effectively fully contracted, according to Deutsche Bank.
Given the new deals, the broker now puts the risk of probability of development at 95%, up from 90% previously, which flows through to a reduced discount to oil parity pricing of 5% compared to 10-15% previously. What this means is an increased valuation for the stock, the broker lifting its net asset value estimate to US$4.78 from US$4.44 previously. This supports its Buy rating on the stock, while the broker’s $7.30 price target is unchanged.
Credit Suisse agrees the new deals were important as the deals in place now equal phase 1 nameplate capacity of 6.3 million tonnes per annum and coming from Asian buyers gives external validation of the project and shows confidence in its ability to deliver.
At the same time the announcement increases the chances of further upside beyond that level as on the broker’s assessment there is now a 50% chance of a third train (the liquification and purification facilities in an LNG plant) being added to the project and this would add substantial value to the company.
UBS shares such a view, estimating a full 3-train development with output of 9.5 million tonnes per annum is worth around $4.91 per share to Oil Search, while there remains additional potential value from a petrochemical development in future years. At present the broker’s net asset value for the stock is $5.54, while its price target is unchanged at $7.40. In contrast Credit Suisse has an $8.00 price target and a valuation of $5.58, up 7% on the back of the new offtake agreements.
According to UBS, a final investment decision for the project remains on track for late this year, with first gas sales to come sometime in 2014. In the broker’s view the project is the best of the green field LNG developments currently being proposed.
The announcement sees Credit Suisse move the stock from the most expensive among its peers to the cheapest, as in its view the project will transform the company’s cash flows and production while still offering leverage to the oil price going forward.
The mispricing between the current share price and the potential valuation supports its Outperform rating on the stock, a view shared by most in the market since the FNArena database shows a total of seven Buys compared to three Hold recommendations.
Citi also has a Buy rating on the stock but cautions if the market begins to focus on a third train being added to the project it may begin to price in the possibility of the company making some kind of equity raising to fund its share of the cost.
While this is a chance, the broker sees it as more likely the company will sell down a portion of its stake in the project from its current 30% level to fund its share of future development costs. RBS Australia agrees but is one of the less bullish on the stock at present, rating it as a Hold given its view the good news of the offtake agreements and what it means for the likelihood of the project is already priced in at current levels.
Shares in Oil Search today are weaker in line with the broader market and as at 11.20am the stock was down 23c or 4.2% at $5.25. This compares to an average price target according to the FNArena database of $6.95, up from $6.88 prior to the announcement of the offtake deals, and a trading range over the past year of $2.95 to $6.93.