Australia | Oct 20 2009
By Chris Shaw
Previously, Oil Search ((OSH)) had announced plans to sell a small part of its stake in the Papua New Guinea LNG project to enable it to finance its share of the project’s development costs, but with that deal no longer proceeding the company yesterday announced a placement at $5.90 per share to raise $895 million.
The announcement was something of a surprise given management had previously indicated it didn’t want to go down the share issue route, but confirmation the sale of its stake to IPIC would require shareholder approval complicated the process as approval would take several weeks as a meeting would have to be organised at which shareholders could vote.
This would in turn mean the company would have issues organising the US$1.3 billion in funds it needed by the time required to meet the Final Investment Decision (FID) timetable of December 8th, so the placement became the best option in the view of management.
As JP Morgan notes, the announcement coincides with an update on capital expenditure expectations for the project and here JPM suggests the information was disappointing, as capex required before the first gas is produced has jumped by about 20% to US$15 billion. The broker points out the increase is in contrast to what had been relatively optimistic commentary from management through the course of this year with respect to the capex outlook.
According to Deutsche Bank, the capex update also raises concerns as the higher capex requirement for the project has the potential to cause some delays with respect to LNG contract renegotiations with likely customer Sinopec. Deutsche Bank suggests any problems here could impact on the economics of the project and the overall timeline, especially leading into the FID. As well, Deutsche suggests there could be a flow on impact with respect to negotiations with other potential customers for the project’s output.
Factoring in the dilution of the new share issue Deutsche Bank’s net asset value on the stock falls to US$4.72 per share from US$5.29 previously, which when translated into Australian dollars sees its price target on the stock fall to $5.80 from $6.55 previously. Others covering the stock have made similar changes, with Credit Suisse cutting its target by 40c to $7.60 and Bank of America Merrill Lynch dropping its target to $7.73 from $8.05.
The average price target according to the FNArena database stands at $7.05, down from $7.21 prior to the announcement of the share placement.
At the same time Deutsche Bank has downgraded its rating on the stock to Hold from Buy as the share price is now at a premium to its revised net asset value. Credit Suisse reacted similarly in moving to a Neutral rating from Outperform previously as it factored in the dilution from the share issue, the rating change also reflecting recent movements in the company’s share price.
Overall, the FNArena database shows a relatively even spread of ratings with the stock scoring four Buys and six Holds but three of the Buys are from brokers yet to update following the announcement of the share placement. As JP Morgan noted in its review of the placement, the $5.90 price is not especially attractive given it is broadly in-line with its valuation on the stock assuming two LNG trains are built.
This leads the broker to suggest further share price outperformance will require clear progress on the development of a third train at the project and this is a long-term story in its view. As well, while there remains potential for reserves of as much as three trillion cubic feet of gas to be proved up, this is more likely to occur in 2011 rather than 2010 and the broker suggests there are few other obvious share price drivers in the shorter-term.
Bank of America Merrill Lynch is more positive however, seeing the capex increase as only a minor negative as while early development costs will be higher, management has indicated life-of-field capex will be largely unchanged. BA-ML also doesn’t see any implications in terms of the worth of the project stemming from the collapse of the deal with IPIC, as it appears it was more a timing issue than anything else. This means the stock remains a Buy in the broker’s view.
Shares in Oil Search today are weaker as the market adjusts for the placement and as at 11.30am the stock was down 52c or 7.7% at $6.23. Over the past year the shares have traded in a range of $2.95 to $6.93.