Oil Search (OSH) released its full year CY16 result yesterday and we view the stock as materially undervalued. OSH holds more economically viable growth at spot prices than its Australian large-cap energy peers combined. Despite this, growth still represents just ~20% of our valuation. While our optimistic oil price forecast drives a supportive valuation on OSH, we believe further upside risk to our numbers exists from the potential for OSH to de-risk its global scale organic growth portfolio of brownfield and greenfield assets. We maintain our Add recommendation. The key risk remains oil price and sovereign risk.
Further value creation unfolding
In Q4, PNG LNG maintained annualised production of 8.4mtpa. After growing its 1P gas reserves 50% to 2,137bcf (on recertification of its reserves), the path now looks clear for PNG LNG to be able to maintain elevated operating rates without having to draw on reserves that are intended for growth (P’nyang and Elk/Antelope).
The recent discovery at Muruk (which sits close to existing infrastructure and on trend from Hides) continues to show exciting promise with sidetrack-1 continuing. This discovery has opened up an entire portfolio of prospective targets sitting on trend with Hides.
Exxon-InterOil given green light
Meanwhile, the largest potential value kicker for OSH that is not currently priced in remains the opportunity for its two flagship LNG projects to be tied together. Cooperation between PNG LNG and Elk/Antelope just took a large step forward with a Yukon court approving Exxon’s acquisition of InterOil (all but paving the way for Exxon’s entry into the Elk/Antelope JV).
OSH estimates cooperation could generate savings of +US$2- $3bn in downstream cost synergies, +US$125m per annum in opex savings, and less tangible but important optimisation of field phasing and schedule acceleration.
Despite the reduced realised oil/condensate and LNG/gas prices during the year, OSH still maintained a strong underlying EBITDAX margin of 69% during the year. The CY16 result was broadly in line with expectations, with revenue of US$1,236m (vs Morgans US$1,285m), EBITDAX of US$852m (vs Morgans US$863m), and underlying NPAT of US$106.7m (vs Morgans US$100.6m).
OSH continues to steadily pay down its PNG LNG debt facility, with net debt finishing the year at US$3.1bn.
Contributed by Adrian Prendergast, Senior Analyst Mining, Energy. Original post here: (VIEW LINK)