Oil Search Upside Remains Tied To PNG Project
By Chris ShawOil Search recorded solid production for the December quarter of 2010, the result being full year output of 7.66mmboe (million barrels of oil equivalent) came in a little above the company's guidance of a result between 7.2-7.4mmboe.Guidance for 2011 is for a result of 6.2-6.7mmboe. Analysts at Citi note the coming year will show lower production thanks to planned shut-downs in the second and fourth quarters related to work on the LNG project in Papua New Guinea.Longer-term, Deutsche Bank notes while production in 2012 should be higher than in 2011 it should then be relatively flat in 2013, which should limit earnings growth over the next couple of years as the LNG project continues to progress.Given the solid production numbers in the period, revenues for the December quarter were also better than the market had been anticipating, the US$156.8 million in sales revenues beating UBS's forecast for the period by 19%.The one minor disappointment in the quarterly report was what BA-ML viewed as an implied delay to drilling work at the Hides project, which is now scheduled for sometime this year rather than the previous guidance of sometime in the coming six months. RBS similarly picked up on this, but sees it as a short-term issue only for Oil Search.On the back of the better than expected result there have been increases to 2010 earnings forecasts across the market, BA Merrill Lynch lifting its net profit after tax forecast by 14% to US$131 million. RBS Australia's forecast for 2010 has increased by US$11 million to $131.2 million, while Citi has made minor changes to its numbers.Numbers for 2011 have generally been reduced though, Citi and Deutsche Bank both lowering their numbers by 16% to account for lower production in the year ahead. In earnings per share (EPS) terms forecasts for Oil Search according to the FNArena database now range from US9-11c for 2010 and from US10-12.8c in 2011.The changes in earnings forecasts factored in by the market has done little to impact on valuations for Oil Search, JP Morgan noting the lift in its 2010 numbers was largely offset by cuts in both 2011 and 2012.The impact on price targets have been similarly minor, UBS lifting its target slightly at the same time as BA-ML has dropped its target by 20c. The average price target according to the FNArena database stands at $7.94.Recommendations are also unchanged, the database showing Oil Search is rated as Buy four times, Hold three times and Underperform once. UBS retains its Buy rating, continuing to see upside for the stock as production increases and from the potential development of a third LNG train at the PNG project.This scope for expansion at the PNG project equally helps underpin Deutsche Bank's Buy rating, while JP Morgan is a little more conservative given an expansion requires sufficient gas reserves to be proved up. As this is yet to occur, the broker does not ascribe full value of any expansion in its model at present. Citi offers the same argument in justifying its Hold rating.RBS Australia also rates Oil Search as a Hold, but points out on a two to three year view the stock offers good value as the PNG LNG project is gradually de-risked and as expansion options crystallise.Shares in Oil Search today are slightly higher and as at 12.40pm the stock was up 3c at $6.78. This compares to a range over the past year of $4.97 to $7.20 and implies upside of almost 17% to the consensus price target in FNArena's database.FN Arena is building the future of financial news reporting at www.fnarena.com . Our daily news reports can be trialed at no cost and with no obligations. Simply sign up and get a feel for what we are trying to achieve.Subscribers and trialists should read our terms and conditions, available on the website.All material published by FN Arena is the copyright of the publisher, unless otherwise stated. Reproduction in whole or in part is not permitted without written permission of the publisher.
