Papua New Guinea (PNG)-based LNG business Oil Search Limited (ASX: OSH) released its quarterly report to the market this morning. Based on the 5% rise to $6.50 the shares have enjoyed so far, it's safe to say the market likes what it saw.
However, are Oil Search shares still a buying opportunity today?
Here's a brief summary of the report:
- Production of 7.72 million barrels of oil equivalent (mmboe)
- Production target of 27.5-29.5mmboe confirmed for the full year
- Revenue down 9% to US$313 million as a result of lower prices
- Negotiation and scoping studies continue to develop additional opportunities in PNG
- Cash of US$914 million and undrawn debt of US$748 million (total liquidity $1.7 billion), against total debt of US$4.2 billion
- Cash-flow break-even cost around US$19 per barrel in 2016
- At current prices (~ US$35/barrel) Oil Search makes enough to cover all costs, interest and sustaining capital expenditure plus throws off free cash for dividends and reinvestment
Oil Search declared it would use its balance sheet to invest in high-yield projects despite the oil price decline, with the expectation that total production could approximately double by 'early in the next decade'. Management announced that gearing could increase slightly during construction of these projects, but would decline rapidly once they were complete.
So What?
Along with Woodside Petroleum Limited (ASX: WPL), Oil Search is one of the few companies in the sector that is in a position to make serious investments in the current market climate. Oil Search appears to be looking to focus mainly on its current operations, with the nearby Elk-Antelope ('Papua LNG') and P'nyang fields in particular representing a significant growth avenue for the business. If Oil Search is able to use its existing infrastructure to service both fields, it would result in significant cost savings (and a corresponding cash benefit) for shareholders.
Some time ago, I wrote that I would buy Oil Search shares under $6 in order to be confident of having a margin of safety in my investment. With the additional exploratory and development work that has been done since then, I would now be comfortable buying shares at around today's prices.
Oil Search shares remain a medium-high risk investment that are likely to remain volatile thanks to uncertain commodity markets and, as such, aren't suitable for every investor.
