Oil Search shareholders keep the faith

SHAREHOLDERS are maintaining faith in Oil Search, enabling it to buck the trend of its peers Santos and Origin Energy whose stocks both dropped this week.
Oil Search shareholders keep the faith Oil Search shareholders keep the faith Oil Search shareholders keep the faith Oil Search shareholders keep the faith Oil Search shareholders keep the faith

Shares in Oil Search jumped 3.5% on Tuesday morning while Santos and Origin, which both operate LNG projects, were trading 0.4% lower each at $7.51 and $11.21 respectively as a major drop in the price of crude weighs heavily on the sector.

Oil Search's shareholders brushed aside the 1.5% West Texas Intermediate oil price fall to $US50.15/barrel. It did not hurt that the company this week reported record quarterly production of 7.41 million barrels of oil equivalent for the second quarter. That was 7% higher than Q1 and 40% up from the same time last year.

While it is well known that the ramp-up of the ExxonMobil-operated PNG LNG projects was the key driver, Oil Search also upgraded its 2015 production forecast to between 27MMboe and 29MMboe compared to its previous guidance range of 26-28MMboe.

Oil Search also managed to lower production costs in the face of declining global energy prices, saying full year production costs would fall to $US9 to $11 per barrel compared with earlier estimates of $10 to $12/bbl.

The company is not entirely immune from dropping oil prices though. Its total Q2 revenue dropped 17% to $US391.5 million as gas prices fell 35% over Q1, although a rebound in crude oil price helped offset some of the loss.

To compare to its fellow LNG producer, Santos also suffered a drop in revenue when it reported its quarterly last week but its share price fell.

Motley Fool analyst Brendon Lau said this was because Oil Search was tipped to generate a "massive amount of cash" from the ramp up of its PNG LNG project in the near-term, which would put it in a strong position to pay down its $4.3 billion debt.

Lay said Oil Search also had $750 million in undrawn corporate credit facilities and held S843 million in cash.

Since PNG LNG started production in April last year it has exported more than 7 million tonnes of LNG in "take or pay" contracts that oblige customers to pay for the gas regardless of whether they need it.

"For this reason, I believe Oil Search is the best placed among the major oil and gas stocks and I see a 20% upside to the stock over the next 12 months," Lau said.