The PNG quake still in the numbers
Oil Search (ASX:OSH) reported lower production numbers for the June quarter, with the Papua New Guinea (PNG) earthquake in February 2018 still the major driver behind the numbers. Revenue for the quarter was lower as a result, with a partial offset coming from a higher realised oil price. Cash was rundown and total debt was reduced, but net debt did rise over the quarter. The company remains on track however to meet 2018 production guidance, with an expectation of being toward the upper-end.
Production for the June quarter on a barrel of oil equivalent (boe) basis fell by 25% on the corresponding quarter in 2017, to 5.4 million boe. The following chart shows quarterly boe production:
Source: Oil Search (ASX:OSH)
The key driver behind the lower output for the quarter was the February 2018 earthquake that occurred in the PNG highlands. The quake shut-in production at the PNG liquids natural gas (LNG) facility (Oil Search’s interest 29%) and the Moran (Oil Search’s interest varies across the three Petroleum Development Licences (PDL) – PDL 2 60%, PDL 5 40.7% and PDL 6 71.1%) and Gobe (Oil Search’s interest – PDL 3 – 36.4% and PDL 4 – 10%) fields. Normal operations recommenced in April 2018, with damage assessed, across all the facilities, as minimal. The company estimates insurance recoveries will gross US$150 million to US$250 million.Â
LNG production was not exempt from the quake impact, with quarterly production shown in the following chart:
Source: Oil Search (ASX:OSH)
Compared to the June quarter 2017, LNG production for the reported quarter fell 16.4%, to 21,382 million square cubic feet. LNG production is solely sourced from the company’s PNG LNG facility. PNG LNG produces condensate, with attributed production to the company of 617,000 barrels for the June quarter. Compared to the June quarter 2017, condensate production was 20.1% lower due to the quake.
The SE Gobe field (Oil Search’s interest – PDL 3 – 36.4% and PDL 4 – 10%) delivered 192 million square cubic feet of natural gas to the PNG LNG facility, representing a fall of 78% on the same quarter from a year earlier. The quake was again the driving factor behind the result.
Like LNG, oil production was not exempt from the quake shut-in. Oil production was lower for the June quarter, following the printing of a 56% fall when compared to the June quarter 2017, to 374,000 barrels. The following chart shows quarterly oil production:
Source: Oil Search (ASX:OSH)
The two biggest oil producing fields in Kutubu (Oil Search’s interest 60%) and Moran, both reported falls in production. Oil production at the Moran field fell 100% on the same quarter in 2017, to zero barrels. The Kutubu field reported a lesser fall of 40% compared to the same quarter in 2017, to 356,000 barrels. Production at both fields was impacted by the quake.
The revised oil production guidance 2018 is forecast to be in the range of 2.8 million to 3.1 million barrels.
Natural gas production from the Hides Gas-to-Electricity (GTE) plant was also lower for the reported quarter. The following chart shows quarterly natural gas production:
Source: Oil Search (ASX:OSH)
Reported sales by the Hides GTE plant fell by 72% on the same quarter in 2017, to 412 million square cubic feet for the June quarter. The Hides GTE plant also produced 8,000 barrels of liquids for the quarter, which was 20,000 barrels lower compared to the corresponding June quarter 2017. Again, the quake drove the result.
The company has indicated that it remains on track to deliver its revised 2018 group guidance forecast to be in the range of 23 million to 26 million boe.
In 2017, the company produced 30.24 million boe.
The quake impact on operational performance resulted in a softer revenue number for the quarter, with higher realized energy prices acting as a partial offset. The following chart shows quarterly operating revenue:
Source: Oil Search (ASX:OSH)
Operating revenue fell by 21% compared to the corresponding quarter in 2017, to US$262.8 million. Operations delivered a negative effect, as discussed, while higher realised energy prices for the quarter were a very pleasing feature, with both oil and LNG prices higher for the June quarter. Compared to the same quarter in 2017, the average realised oil price printed a 42% increase, to US$72.55 a barrel. Moreover, the realised LNG and natural gas prices rose by 11.3%, to US$8.83 per million British Thermal units.
Our pricing outlook for the energy sector remains positive.
We see natural gas and its LNG derivative being in demand over the medium to long-term, resulting from the sea change in public opinion on carbon emissions. Price volatility may persist in the near-term as the oil market remains in supply surplus, but there is tension in the pricing. The following chart shows the WTI price for the past five years:
Source: macrotrends
Oil production from Libya (June 2018 read 708,000 barrels of oil per day (bopd) and Iran (June read 3.8 million bopd) remain under geopolitical clouds. Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) had indicated adding an extra 1.0 million bopd to the 32.5 million ceiling. Data reads are yet to confirm additional production is coming on stream from OPEC, which is keeping traders skittish on any oil price rallies. Furthermore, crude demand in the United States and in China, the two biggest consumers of crude product, remains robust and should act as a tailwind against any major oil price weakness.
We have maintained our end-year oil price forecast for West Texas Intermediate (WTI) in the range of US$70 to US$80 a barrel and for Brent US$74 to US$84 a barrel. At the time of writing, WTI was trading around US$70 a barrel and Brent US$75.
On the daily chart, the technical picture has improved significantly in recent months. Resistance at the January 2018 high of $8.13 has given way, and now stands as a new layer of support. Prices have also moved above the 50-day moving average (red line) and the 200-day moving average (green line). The May high of $8.64 has been usurped, and resistance now stands at the July high of $9.24.
The company does not provide specific details on operating costs. Management has however, indicated that the cost of the quake will push the first half unit production costs above the full year guidance range of US$10.50 to US$13.50 per boe. The company will report its first half result for 2018 on 21 August 2018 and will provide greater clarity on costs at that time.
The company has provided a glimpse into its balance sheet, to reveal lower cash holdings and debt, but a rise in net debt to 30 June 2018. The quake did not have a significant impact on the balance sheet. Net debt at 30 June 2018 rose to US$3.0 billion from US$2.8 billion from a year earlier, or a mere US$235 million.
The company’s cash position plunged to US$412.1 million from US$973.8 million at 30 June 2016. Reported debt also improved by US$326.3 million from the year earlier result, to US$3.5 billion. The company indicated that all the debt was PNG LNG project development related. We have no concerns, from the data provided, with the structure of the company’s balance sheet. Greater clarity around the balance sheet will be provided when the company reports its interim result on 21 August 2018.
With reference to the monthly chart, prices have climbed above a series of Fibonacci retracements (blue set of retracements) in recent months. A break above the 61.8% and 76.2% Fibonacci retracements at $8.23 and $8.85 respectively has improved the picture further. This now brings the all-time high of $9.88 (horizontal solid-red line) into focus.
We believe the 30-year plus life of the facility underpins the long-term value this company has the potential to generate. We view the June quarter as an outrider result and in no-way does it dint our opinion of the prospects of the PNG LNG facility. Furthermore, ongoing exploration and development activities can be funded from the cash flow PNG LNG delivers.
With blue sky potential to expand the PNG LNG facility through exploration of both offshore and onshore PNG, a region with an excellent energy pedigree, can only add further value to the share price.
Further trains can also be added to the existing facilities to increase future production at lesser costs than the original US$19 billion price tag.
The leverage the company offers in an energy hungry environment, warrants our ongoing support. Consequently, we continue to recommend Oil Search (ASX:OSH) as a buy for Members with no exposure to the stock.
Disclosure: Oil Search (ASX:OSH) is held within the Fat Prophets Mining and Resources, Concentrated Australian Share and Global Opportunities managed account portfolios.
