OSH Other gas commercialisation options will now be pursued ahead of the PNG pipeline 01/02/07 10:08 Anthony Bishop
OSH; Energy; Other gas commercialisation options will now be pursued ahead of the PNG pipeline
ANNOUNCEMENT SUMMARY
The PNG Gas Project participants have recently completed a review of development options for the PNG Gas Project, which commenced mid-2006.
In light of the superior returns that may be achieved from alternative opportunities, the PNG Gas Project participants have agreed to suspend work on the project and concentrate development of the Hides & Kutubu resource into higher value projects.
OSH noted the alternative development options, including LNG, petrochemicals and other in-country options that were not present 2 years ago are now demonstrably more attractive and cannot be ignored.
OSH stated "Although it is disappointing that activities have ceased on the PNG Gas Project, the alternative development options now represent an opportunity to deliver superior returns, and will add significant medium and long term value and growth potential for both Oil Search and Papua New Guinea”.
GSJBW COMMENT
1. Although some may view this announcement as a negative (as they believed the PNG Gas Project would proceed), we view this as positive as it now clears the way for alternative gas development options to be pursued which we believe offer higher value, albeit longer dated, growth.
2. Our current earnings/valuation estimates for OSH already assume the PNG Gas Project does not proceed and that alternative gas development opportunities in PNG are pursued which we value at ~$1.70/share. They are as follows:
* Liquids Cycling at Juha/Hides (2011) ahead of an LNG development to maximise value. We assume startup in 2011 delivering value of $0.30/share to OSH
* Domestic Gas (2011) ~150PJ pa of domestic gas sales delivered to various in-country development options including fertilizer (Oswal), DME/Methanol (Itochu/Mitsubishi) and power generation. We value this potential development at $0.40/share to OSH
* LNG (2013): 6mtpa facility with startup in 2013 which we value at ~$1.00/share to Oil Search. We note Oil Search has indicated the facility may initially be 3-4mtpa with a target of first delivery in 2012.
3. A conference call will be held for analysts & fund managers at 10.30am AEST today which can be listened to via the OSH website: www.oilsearch.com
4. Maintain BUY for OSH. Whilst we recognise the long dated nature of the growth options and a lack of production growth in the interim, we believe that as further details are released on OSH's growth opportunities in PNG and the projects progressed, value will be crystallised which will in turn drive share price appreciation. Furthermore, the large drilling program in CY07 and beyond may also discover sources of near term production growth that can drive modest increases in production in the interim. In the event the market does not embrace the potential uplift in value offered by static gas resources, we believe OSH offers corporate appeal as indicated by recent reports (e.g., Bloomberg) that Oil Search could be the subject of an imminent takeover offer.
