Oil Search (OSH) News

Submitted by Jim Thesiger on 12 June, 2008 - 13:31

Oil Search (OSH) has a target price of A$7.08/share and a recommendation to Buy/High Risk from Australian stockmarket analyst Macquarie Research Equities.

Oil Search Ltd (OSH): LNG Phase II - Hides Potential Could Underwrite Expansion

PNG LNG Project expansion included in valuation — With the PNG LNG project now in FEED we have moved to include a risked valuation for a third 3.15Mt/yr liquefaction train. We value an expansion at $0.49/share risked at 50%. This inclusion, in conjunction with our oil price upgrade, lifted our target price to A$7.08/share and our recommendation to Buy/High Risk (1H)1.

Hides resource could underwrite expansion — Pressure data from the last Hides well suggested that the gas column may have a vertical extent of ~2,000m, far greater than the current 1,240m used for 2P reserve calculations. As a result, we consider that Hides could provide the gas feedstock required to fuel a third train as ~10Tcf of gas is held within the 3P reserve category.

LNG Project major beneficiary — We have upgraded our valuation for the PNG project to A$3.76/share due to our revised LNG price assumptions. This uplift has been partially offset by an increase in our A$/US$ assumption and an increase in our nominal upfront capex due to increased inflation assumptions.

Strong Oil Price Leverage — Oil Search’s current production is almost 100% oil, and with LNG prices becoming increasingly indexed to oil, Oil Search represents one of our most leveraged oil price plays.

High oil price relieves balance sheet stress — Oil Search relies on cashflows from existing operations to provide part of the ~US$1.5bn in equity needed to fund PNG LNG. Based on our current price and production assumptions Oil Search should not need to revert to the market for capital.

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