The Company
Oil Search (OSH) has been incorporated in Papua New Guinea since 1929 and has a market capitalisation of PGK28bn ($9.6bn). OSH has a 29% interest in the PNG Liquefied Natural Gas (LNG) project, which is operated by ExxonMobil PNG. The PNG LNG project has a capacity of 6.9m tonnes per annum (tpa) that came on-stream in 2014. This project has transformed OSH into a significant oil and gas producer with a long-term, low-cost high-quality LNG revenue stream. The company also holds a significant interest (28%) in the proposed Papua LNG project, operated by Total (40.1%), which has the potential to become PNG’s next major LNG development.
OSH delivered strong performance both operationally and financially in FY 2015. Despite the current oil price, OSH was able to generate positive cash flow and boost its total production by 52% to 29.3m barrels of oil equivalent (boe) owing to its low-cost production assets and sustaining capital. OSH was also able to maintain a strong balance sheet and sufficient liquidity, proving that the company has the financial capacity to continue its investments in its globally competitive LNG growth opportunities. Oil fields in Kutubu, Moran, Gobe Main and SE Gobe are still generating quality production and revenue, while Kutubu and Moran fields produced more than 95% of the total oil output in 2015. The positive cash flow generated was used to fund the 2015 final dividend and invest in its high-potential growth activities.
On May 20, 2016, OSH announced the acquisition of 100% of InterOil, OSH’s joint venture partner in the Elk-Antelope discovery, which underpins the proposed Papua LNG project. OSH also executed a memorandum of understanding (MoU) with Total for the back-to-back farm-out. In the MoU, which is subject to completion of the proposed InterOil transaction, OSH agrees to sell 60% of the PRL 15 interest acquired to Total and sell 62% of the acquired exploration assets to Total. After paying for the additional equity in PRL 15 and equity in InterOil’s exploration assets, Total will also pay OSH a cash amount of $141.6m on July 1, 2017 and $230m at final investment decision for the Papua LNG project, as well as the equity interests in PRL15 as follows: OSH 29% and Total 48.1%.
The main objective of the MoU was to maximise the value of the Papua LNG project through minimising capital and operating cost, project acceleration and optimal utilisation of the resources. The proposed deal will see the combined company having the opportunity to deliver significant value for all stakeholders through the promotion of long-term cooperation and potential integration of PNG’s LNG projects.
Outlook
At the end of the first quarter of 2016 OSH remained on track to deliver 2016 production within the 27.5m-29.5m boe guidance range and an increase of 3% in the company’s total production to 7.72m boe. This was on the back of high levels of “facilities up” time from the PNG LNG project, which realised an annualised rate of approximately 8m tpa, the highest quarterly rate since the project came on-stream in 2014. The increase in total production represents the fourth successive period of growth and a new record for quarterly production for OSH. From the PNG LNG project, the net production to OSH was 5. (https://modtreks.com) 94m boe (25.8bn cu feet of LNG and 0.88m barrels of liquids). LNG, gas and liquid sales were up by 18% and 2%, respectively, in the the first quarter of 2016. However, that was not enough to withstand the decline in both the average realised LNG and gas price and the average realised oil and condensate price, to $6.84 per million British thermal units and $34.76 per barrel, respectively, which led to a 9% drop in revenue to $313.1m from the previous quarter. The company maintained a strong balance sheet, with cash on hand of $914m and debt of $4.23bn in the first quarter of 2016. This includes $748m of undrawn corporate credit facilities. Total liquidity remained largely unchanged from the end of 2015 at $1.66bn.
