macquarie rate osh "outperform" - $8.75 target

macquarie just released a new research note on osh overnight. for those interested, here's the summary (with their recommendation at the very bottom of text ...):

"OSH AU Outperform
Price 26 Oct 10 A$6.49
Volatility index High
12-month target A$ 8.75
12-month TSR % +35.4
Valuation A$ 8.75
- DCF (WACC 10.8%, beta 1.3, ERP 5.0%, RFR 6.1%)
GICS sector Energy
Market cap A$m 8,521
30-day avg turnover A$m 25.5
Number shares on issue m 1,313"

"Oil Search
Ticking along nicely ahead of main event Event OSH reported 3Q production and revenue results.

Impact
Production strong?: Production of 1.85mmboe was 10% ahead of our forecast driven by Kutubu and Hides which both performed significantly better than guidance at the 1H result. Consequently, OSH continues to defy the
natural underlying decline rates of these mature fields and is tracking towards full year production of ~7.7mmboe which is well above the current guidance of 7.2?7.4mboe. In light of this result, we have raised our forecast for 2010 production to 7.5mmboe ? above the top end of the guidance range. ?but revenue even stronger: OSH reported revenue of US$142.2m (35% ahead of our forecast) driven largely by the strong production result but also a significantly smaller under-lift than forecast. We note that OSH typically
witnesses significant inventory builds in 3Q and in the same period last year OSH's under-lift was 263kbbl ? this compares with a modest over-lift this period (after allowing for internal usage). Budget and schedule maintained at PNG LNG: While it remains early days,
the PNG LNG project appears to be making a solid start with the reported progress in line with the milestones presented earlier in the year. Although OSH's share of this year?s PNG construction costs are already ~U$880m versus the full year guidance of U$1,000m, we understand that this merely
reflects the phasing of lumpy EPC payments to Chyoda and that the rate of spend is in line with expectations. Increasingly vocal about accelerated Hides drilling: In the 2nd paragraph on the first page of this release, OSH talks about the growing momentum behind LNG expansion opportunities including an accelerated Hides drilling
programme. In our view, giving this story increasing prominence shows management's determination to see this happen but perhaps also growing confidence that Exxon to will agree to seeing these wells drilled earlier.

No clues yet from the Strategic Review: While the ongoing Strategic Review is nearing completion, OSH gave away few clues as to its findings other than confirming that the results will be drip fed into the market towards
the end of the year and early next. However, management?s constant references to this process suggest we may see some material findings.

Earnings and target price revision
We have raised our 2010 earnings by 6% to 9.9 US cents to reflect the strong performance in 3Q and also our expectation of higher full-year production
volumes. Our NAV remains essentially unchanged at A$8.75/sh.

Price catalyst
12-month price target: A$8.75 based on a DCF methodology.
Catalyst: There would appear to be a growing likelihood that OSH could announce an accelerated Hides drilling programme by the end of the year.

Action and recommendation
Maintain Outperform rating and A$8.75 price target: As expected, there was little in this update to change the investment case. Current operations are
clearly performing ahead of expectations and the early signs from the LNG project are encouraging."