Australia | Feb 22 2012
– Oil Search delivers solid full year result
– This year a big one for exploration and capex
– A farm in and T3 could also deliver value
– Brokers remain positive on the stock
By Chris Shaw
Underlying net profit for Oil Search ((OSH)) for 2011 was US$236 million, a result broadly in line with market expectations. Along with the result management reiterated production and cost guidance for 2012, meaning post result changes to broker models were relatively modest.
While guidance is unchanged, BA Merrill Lynch suggests 2012 will be a big year for Oil Search, as there will be significant exploration drilling carried out in PNG and capex for the LNG project in that country should hit a peak.
The latter coincides with peak construction for the PNG LNG project and if successful, the development progress this year should significantly de-risk the project from a cost and schedule perspective in BA-ML's view.
For JP Morgan, the significance of the exploration work to be undertaken is the potential for enough gas to be found to fill T3 at the PNG LNG project. The timing of exploration centred on T3 has slipped a little, so at the earliest the broker suggests any FID for Train 3 will now likely be no earlier than 2014.
Any go ahead on a third train is significant for valuation, as Citi estimates a discounted cash flow valuation for Oil Search including PNG T1&2 is around $6.80 per share, increasing to $8.26 per share assuming an unrisked T3.
Oil Search plans to find a farm-in partner for its interests by the middle of this year and Citi notes there is strong interest from a number of players with good credibility in the LNG sector. On an unrisked basis, Citi values a two train project at around $3.00 per Oil Search share assuming a farm down to a 30% stake, or $2.00 per share if FID is delayed until 2016.
This value is enough for Citi to upgrade to a Buy rating, from Neutral previously. The upgrade also reflects recent share price underperformance by Oil Search relative to both Woodside ((WPL)) and Santos ((STO)).
BA-ML similarly sees value, pointing out Oil Search at present is trading at an 8% discount to the valuation of producing assets and PNG LNG T1&2. With Exxon having a good history in terms of project execution, BA-ML suggests risks to valuation from the PNG LNG project are skewed to the upside.
The likes of Deutsche Bank and RBS Australia also see good value in Oil Search, especially given positive views on the likely direction of oil prices in the year ahead. The FNArena database shows a total of seven Buys for Oil Search compared to one Hold, the odd man out being JP Morgan.
The first point in support of JP Morgan's rating is signs cost pressures are increasing. As an example, the broker notes opex guidance for 2012 is US$21-$24 per barrel of oil equivalent, up from US$19-$21 per barrel last year.
The other point made by JP Morgan is while Oil Search appears attractive at current levels, there is better value elsewhere in the sector. JP Morgan's sector preference is Santos.
On the back of Oil Search's full year result the adjustments to broker models have had only a limited impact on share price targets. The consensus target according to the FNArena database now stands at $8.33, up from $8.24. Targets range from Citi at $7.82 to BA-ML at $9.02.
Shares in Oil Search today are higher and as at 11.20am the stock was up 16c at $6.88. This compares to a range over the past year of $5.43 to $7.64 and implies upside of better than 21% relative to the consensus price target in the database.
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