OSH: We flagged a couple of months ago this stock was a low risk free-call on the PNG gas pipeline. Well it came good. Oil Search yesterday announced the decision for the Highlands Gas Project to move to the Front End Engineering Design (FEED) phase of development. This phase is estimated to cost US$80-100m, with Oil Search's share of costs being up to US$55m. FEED is expected to take 12-18 months, with a decision on project sanction expected by end-2005. This is a significant step for the project that will provide customers with greater confidence in timing of first gas deliveries.
The decision to move to FEED was influenced by the signing of a further two conditional gas sales agreements - with Queensland Alumina Ltd (12-30PJ pa) and CS Energy (10PJ pa) for 20 years.
Our previous assumptions were for production to commence for the liquids phase in 2008 and gas in 2012. The combined gas and liquids project is now expected to commence in late 2008. This is expected to have positive implications on our valuation, which we estimate at A$0.10 per share – now $2.04 with a price target of $1.70.
Additional details:
In addition, Oil Search has also negotiated an option to buy 400PJ of gas for US$120m from Esso Highlands Ltd, to be supplied from the Hides gas field. The terms of this option are dependent on the volume of gas contracted by first production, and in our view further supports the project.
Oil Search have also recently stated that they would be keen for Santos to rejoin the project and discussions are ongoing.
OSH Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
