Oil Search (ASX: OSH) is one of Australia's largest oil and gas producers, with exploration projects in wells in the Middle East, Papua New Guinea and North Africa. Oil Search draws most of its revenue from its large projects in PNG, with hopes of expanding with its Taza exploration wells in the Kurdistan region of the Middle East. Its LNG project in Papua New Guinea is 90% complete at this stage, and Oil Search expects LNG deliveries to begin in the latter half of 2014.
Oil Search is currently sitting on reserves of 338 'proven' million barrels of oil equivalent (mmboe) and 552 mmboe 'probable' , which will safeguard production for over 20 years at least, assuming today's rate of extraction. Production will almost definitely increase during this time making this estimate nebulous at best; just know that Oil Search isn't running out of oil any time soon.
Just yesterday, Oil Search announced that its production for 2014 would be some 2 mmboe higher than previous forecasts, which is expected to add significantly to the company's bottom line in 2014.
As the LNG project in Papua comes online at the end of 2014, Oil Search can expect another material increase in its earnings, which will no doubt have investors hoping for an increase in dividend payments. Oil Search currently pays a measly 0.5% (2.14 cents) of its current share price, unfranked.
Debt and the price-to-earnings (P/E) equation
Oil Search's measly dividend is no doubt due to the fact that it is labouring under the better part of $4 billion in debt, with only $210 million cash in hand and another $300 million of available debt facilities to be drawn on.
This huge amount of debt is due to the high capital costs associated with Oil Search's projects and the unique challenges posed by rough terrain in PNG. Thankfully for investors, the Papua gas project is fully funded through to its completion and should significantly boost earnings, lowering its P/E from today's obscenely high 60.74. Debt should also begin to decrease, though I would surmise it will be a number of years before Oil Search begins to lift its dividends to any meaningful percentage of its share price.
Foolish takeaway
Oil Search is absolutely a company that investors are buying into in the hopes that earnings growth will accelerate enough to justify its current price tag. Even so, today's price looks as though it is high enough to contain a considerable amount of earnings growth, and there is very little to keep investors happy while they wait (certainly not dividends).
For those who already own Oilsearch, there is no reason to sell because the coming years are when this company should come into its own. Potential investors might be better off looking at Woodside Petroleum (ASX: WPL), Santos (ASX: STO), or smaller producers Beach Energy (ASX: BPT) and Aurora Oil and Gas (ASX: AUT).
