Australia | Apr 20 2016
-Elk/Antelope resource next catalyst
-Likely delay to train 3
-Is too much growth being factored in?
By Eva Brocklehurst
Oil Search ((OSH)) impressed brokers with its March quarter production and operations, continuing to set records at PNG LNG. Ord Minnett observes PNG LNG continues to be an outstanding producer, with full year guidance implying production levels that are 9-14% above nameplate.
The broker notes final investment decisions on the company's two major growth projects – PNG LNG's train 3 and the Papua LNG expansion – are a year away. While there are significant hurdles to any joint development given ownership structures are different, Ord Minnett notes, if some of the company's flagged intent on co-operation could be obtained, there would be major cost savings.
Otherwise, the catalyst over the next year is considered to be the establishment of foundation customers and long-term contracts to underpin projects and the broker retains a positive view on the stock with an Accumulate rating, given the company's interests in these low-cost assets.
Quarterly production at PNG LNG was an annualised 8.0mtpa and revenue of US$313.1m was above broker estimates. Record sales volumes were offset by lower realised prices of US$6.84/ mmbtu for LNG and US$34.76/bbl for oil. Production guidance for 2016 of 27.5-29.5mmboe is maintained.
Production drove a 10% revenue beat on Deutsche Bank's forecasts. The broker notes the Elk/Antelope JV is now undertaking a resource certification process for the field, with the resource size likely to be be known around mid year. If it exceeds 7tcf, the broker notes Oil Search will be liable for a milestone payment to the original owners of the resource. For example, at 8tcf a US$177m milestone payment will need to be made.
This resource determination is the next catalyst in Morgan Stanley's view. The broker considers the company’s long-term growth options are attractive, but time is needed to determine the expansion opportunities. Development capex remains low, which highlights the attractiveness of PNG LNG, in the broker's opinion. Operations are breaking even on cash flow at around US$19/boe and, on the broker's modelling, assuming mandatory debt repayments and maintenance capex in the low US$30/boe range, this is defensible.
Credit Suisse concurs. Even into a depressed spot market the cash flow from de-bottlenecked volumes helps and there is large operating leverage, given the low cash cost of these volumes, the broker points out. Therefore, when spot prices return to more normal levels the upside is significant. While the broker finds it hard to make to definitive a statement on the value of the growth portfolio, it does not dispute the fact the projects are world class.
Credit Suisse is also interested in the company's comments regarding co-operation, and possibly integration, of the two projects although considers it relies on the two majors, Exxon and Total, playing nicely and acting rationally. The broker retains a Neutral rating, as with three incremental trains risked at 65% of net present value this is effectively fully de-risking two of them. Meanwhile, the pathway on timing, funding and costs remain unclear and, hence, the quandary. Credit Suisse wonders whether waiting for the “right” price to own the stock may be foolish, but wait it will.
UBS notes the higher LNG output will mean more gas is required to keep both trains full for 20 years, raising the level of gas volumes that are required to underpin a third train. The delays in P'nyang appraisal drilling reinforces the broker's view that train 3's final investment decision won't be made until 2018 at the earliest. The broker's start up time frame has been pencilled in for 2023.
The company's LNG exposure may be the best in its class but the low oil price and oversupplied LNG markets are expected to impact further cash flow and create challenges in moving new LNG trains into the development phase. UBS does not expect the market to re-balance until 2023. Hence, the broker believes the market is factoring too much for the company's growth story and retains a Sell rating.
Macquarie looks forward to having greater clarity on undeveloped resources by year end. Following the conclusion of the certification of Elk/Antelope the company expects that re-certification of the Hides, Angore and AG fields will commence. This provides further basis, the broker contends, for the company to move the proposed acceleration of AG fields into Front End Engineering Design by the end of the year.
FNArena's database shows four Buy ratings, three Hold and one Sell (UBS). The consensus target is $7.28, suggesting 7.5% upside to the last share price. Targets range from $6.26 (Morgan Stanley) to $8.40 (Morgans).
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