Oil Search relies on higher prices for sales lift
Higher than expected oil and LNG prices saved takeover target Oil Search from posting flat revenue in the June quarter, as investors await a breakthrough in the stand-off with suitor Santos over its $23 billion takeover approach.
The Papua New Guinea oil and gas producer, which has declined to engage in discussions on the potential deal, posted a 21.5 per cent increase in revenue in the June quarter to $US366.2 million ($495.7 million) from the March quarter.
Maintenance work reduced output at the PNG LNG plant in the June quarter. Richard Dellman/AdvantagePNG
However production dipped and sales volumes flatlined, meaning likely steady sales without the significant increases in commodity prices, which amounted to almost 25 per cent for oil and condensates and 21.3 per cent for LNG.
Acting chief executive Peter Fredricson, who replaced Keiran Wulff early last week after Dr Wulff abruptly resigned, acknowledged the macro environment “helped drive an increase in revenue despite the planned rate reduction at PNG LNG during the quarter”.
Mr Fredricson did not mention the takeover approach from Santos but sought to remove market uncertainty over intentions at the $US3 billion oil project in Alaska, where investors have voiced worries that a final investment decision could be made without Oil Search having reduced its 51 per cent interest, leaving it bearing more risk and cost.
“It is in everyone’s interest – Oil Search, shareholders, JV partners – that we commit to FID [final investment decision] on this high-quality asset only when appropriate funding and ownership levels (across upstream and infrastructure) are in place,” Mr Fredricson said.
The comments confirm that Oil Search has scrapped an earlier target for it and 49 per cent partner Repsol to give the go-ahead for the Pikka project by the end of this year.
But Simon Mawhinney at Oil Search investor Allan Gray voiced concern that still left the door open to moving forward with the project by taking on significant project finance debt, whereas he absolutely wants Oil Search to first sell part of its 51 per cent stake at a supportive price.
“If it is not clear to the company, the investor base has zero appetite to see Alaska progress without a proof-of-concept sell-down,” Mr Mawhinney said.
Still, he is backing Oil Search’s stance that the terms of Santos’ scrip-based merger approach undervalue its assets.
“To be fair, if Santos don’t come up with a better offer then I think that this marriage is not made in heaven and it just won’t happen,” Mr Mawhinney said.
Bernstein Research analyst Neil Beveridge expected others to be sharpening their pencils on potential counter-offers, but voiced concerns about the vacuum in the ongoing leadership at Oil Search after Dr Wulff’s sudden exit.
“Oil Search have world-class assets but the departure of the CEO leaves the company rudderless at a critical point with major investment decisions looming in PNG and Alaska,” Mr Beveridge said.
“While the board will be seeking a successor, we expect rivals to be preparing further bids.”
Shares in Oil Search closed down 2¢ at $3.93 on Tuesday, while Santos edged up 1.4 per cent to $6.55.
Oil Search’s production slid 4.1 per cent from the March quarter because of maintenance outages to 6.6 million barrels of oil equivalent, but Oil Search kept its guidance for full-year output unchanged at 25.5 million to 28.5 million boe. Cost guidance was unchanged apart from “other operating costs” that are now expected to be higher as increased prices lift royalties and fuel costs.
JPMorgan analyst Mark Busuttil still described the quarter as “strong”, saying both production and revenue were above his estimates.
Average oil and condensate prices surged 24.7 per cent to $US71.55 a barrel, while Oil Search’s average LNG and gas price increased to $US8.61 per million British thermal units, higher than its rivals Woodside and Santos.
Meanwhile, Oil Search and its partners still aim to start engineering and design work on a slimmed-down expansion of LNG in Papua New Guinea next year. Mr Fredricson said work on financing and technical and commercial aspects of the Total-led Papua LNG project progressed during the quarter, allowing the project to progress.
From Australian Financial Review
