Oil Search Limited (ASX: OSH) is an LNG producer operating out of Papua New Guinea. The company has recently announced it will have reduced its workforce by 34% by the end of this calendar year. The impetus for this has been the dramatic and sustained reduction of oil prices. However, this is not the end of the story. No matter how you look at it, the Oil Search share price has had a terrible year so far.
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2020 in review
Oil Search entered the new year with a new Managing Director, Dr Keiran Wulff. He replaced Mr Peter Botten, who led Oil Search for an amazing 25 years. During this time, Mr Botten took the company from $250 million in market capitalisation to around $11 billion.
In February this year, Oil Search announced that talks with the PNG government on the P'nyang Gas Agreement had stalled. This was a complex joint venture arrangement with Exxon Mobil Corporation and Santos Ltd (ASX: STO) which the company had been touting for several years.
Even though the project has not been entirely abandoned, the delay has already had a significant impact. As noted by Wood Mackenzie research director Angus Rodger:
"…From both a macro pricing and a contractor quality/pricing perspective, trailing in the wake of the biggest wave of new LNG supply the industry has ever seen is not ideal."
In other words, Oil Search has already lost the window for enabling forward contracts to be written at prices to maximise profits.
Shortly after this disappointing development came the pandemic and associated restrictions in March. This was followed very closely thereafter by the Saudi/Russian oil price feud.
By April, Oil Search had a new Managing Director, the loss of major revenue-generating infrastructure, and an oil price that was getting closer to the company's rising production unit costs. It really doesn't get much worse than this.
Oil Search's response
In response to these headwinds, Oil Search has totally reshuffled its executive leadership team. There is a clear focus on efficiency, operational excellence, and leveraging technology. As a result, the company's production costs are expected to be approximately US$10.50 per barrel of oil equivalent (BOE) as opposed to the USD$11 – $12 initially forecast. Moreover, all non-essential capital expenditure has been suspended or deferred in PNG.
At the time of writing, the LNG spot price has just come off its lowest point for 25 years due to an oversupply and reduced demand resulting from warmer than usual winter temperatures. Oil Search does, however, only have less than 10% of its current production exposed to spot prices.
It was also able to raise US$700 million through a share placement. On 5 May, Oil Search was forecasting a liquidity of US$1.8 billion in cash and no near-term debt maturities.
Foolish takeaway
It is currently trading at a price to earnings (P/E) ratio of 11.08, however the Oil Search share price remains down 54% year to date. I feel the discipline the company has shown in managing its costs and curbing expansions has been impressive. So much so that I'm starting to think this could be one of the great turnaround companies of the year.
Nonetheless, I do think low LNG and oil prices will stick around a while longer, particularly with demand remaining low and coronavirus trends turning upwards. This could definitely put a dampener on the near to medium-term performance of the Oil Search share price.
Having said that, investing in Oil Search today will get you a trailing 12 month dividend yield of 4.26%. I also think you will likely see some share price growth. Although it is hard for me to see it returning to its former price range until future significant reserves are planned to come online at a profitable price.
