Is Oil Search set to overtake Santos in 2014?

Oil Search will benefit from the completion of the PNG/LNG project in 2014.

Andrew Mudie

Andrew joined the growing team of Motley Fool freelance writers in mid-2013 following years of personal development as a passionate self-taught sharemarket investor. At the time, Andrew was an engineer by trade, writer by hobby, and an investing nerd by passion who spent far too many breaks reading, writing and learning. Andrew’s first investing lesson came with his first stock selection in 2011 when takeover rumours caused a spike and subsequent plunge in the share price of Woodside and then the 21% fall in the market through mid-2011. The next four years of investing saw Andrew dabble in a vast array of strategies until settling on his favourite investment methodology, which is closely aligned with that of the Motley Fool: Fundamentals-based long-term buy-and-hold of great companies at great prices.

Published August 5, 2013 1:58 pm AEST

Australian-listed Papua New Guinea oil and gas producer Oil Search (ASX: OSH) is set for a huge earnings boost in 2014 with the first production expected from the PNG/LNG project in Papua New Guinea. Oil Search's 29% share will produce around 1.94 million tonnes of LNG per year, equivalent to 19 million barrels of oil. If fully realised, Oil Search will quadruple its current gas production by the end of 2015.

The PNG/LNG project is 90% complete and will be operated by major shareholder ExxonMobil (NYSE: XOM), the world's largest oil producer. First production is expected in first half 2014, with ramp up to full production expected to be complete in 2015. ExxonMobil appears confident in the $19 billion development and is exploring opportunities to add an additional two production units to process gas from nearby fields.

The effect of the project on Oil Search is expected to be huge. Earnings before interest tax and other charges (EBITDA) are forecast to rise from around $446 million currently to $735 million in 2014, and $2.1 billion in 2015. This compares favourably with another big Australian LNG producer, Santos (ASX: STO).

Santos, a 13.5% shareholder in PNG/LNG, currently has a market cap of $13.3 billion and EBITDA of $1.7 billion, which is expected to rise to $2.9 billion in 2015. The Oil Search share price has risen strongly in the past six months, from a low of $6.81 in April to close at $8.21 on Friday, implying a market cap around $10.8 billion. Much of the share price gain is based on potential, rather than results at this stage, but analysts expect it to continue to rise to rival the market cap of Santos as production at PNG/LNG successfully ramps up.

Oil Search may also benefit from new gas discoveries, such as the recently announced oil finds at the Tarza oil field in Iraq and at Mandanda 6 in the gulf of Papua, and gas at Flinders 1, also in the gulf of Papua. The PNG/LNG project and new discoveries have the potential to turn Oil Search into a strong, low-cost gas and oil producer and may result in a healthy dividend payout as focus switches from construction to production.

Brokers are generally positive on the company. Macquarie, BA Merrill Lynch, Deutsche Bank and UBS all recommend buying the stock, while Citi, JP Morgan, and Credit Swisse are positive on the stock but weary of the strong price growth in the last 12 months.

Foolish takeaway

Oil Search is well placed for strong share price gains in the short to medium term as the company's revenue will grow strongly as new projects come online. If all goes to plan, Oil Search will challenge Santos' market cap in coming years and may well develop into a strong dividend payer as projects move into production. Investors with a high tolerance to risk may look to purchase on any pullback in the share price.

Interested in our #1 dividend-paying stock? Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

More reading

Motley Fool contributor Andrew Mudie does not own shares of any companies mentioned in this article.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.