PNG based OSH is listed on the Australian and Port Moresby Stock Exchanges and trades in the US via ADRs.
The company operates all of the producing fields in Papua New Guinea (PNG) and has a 30% interest in the PNG LNG project. OSH has a long and profitable history of oil production in the PNG highlands but much of the perceived value is in substantial gas resources, so far quarantined by a lack of infrastructure and high capital costs. OSH is an all or nothing bet on PNG LNG with associated single project risk.
Our fair value estimate is $5.90 per share currently trading at $7.28 as such in our view a time to take some profits.
OSH has a strong balance sheet but is not for conservative investors. Sovereign and development risk need consideration.
OSH full year 2011 production guidance at 6.2-6.7mmboe, a 15% decline on FY10. Impacting are natural field decline and a two week shutdown for tie-in of associated gas facilities. Production is then expected to remain relatively steady into 2012 and 2013. Our 2011 earnings forecast are unchanged at 12.9cps; lower than 2010 due to higher unit operating costs on lower volumes.
Share price appreciation to $7 sees our recommendation move just inside the Reduce zone, a downgrade from Hold. Valuation sensitivity reflects hefty up-front PNG LNG capital expenditures in the lead up to first gas production from late 2013.
For more information on Oil Search (OSH) please contact us on 07 4771 4577.