Oil Search – first gas looms

OILOil Search is now within months of running first test gas from Kutubu in the Papua New Guinea highlands down the pipe to the ocean and across the Gulf of Papua to the LNG facility just west of Port Moresby. Gas for LNG export will commence flowing mid next year. The Komo airstrip in the highlands will commence flying any day allowing equipment to access the project quickly from here. Oil Search has a 29% interest in this $19 billion investment operated by ExxonMobil. Oil Search has been a core holding in our portfolios for years now and we see the stock moving into a transitionary stage from here. Most importantly, the project, now more than 80% constructed, is within a year of moving from cash outflow due to capital expenditure to cash inflow from LNG sales. Oil Search also has diversifying exploration assets in the Gulf Of Papua (drilling now) and the promising Taza well in Kurdistan.

While the project is not yet finished and there are always hurdles during commissioning, we believe the arrival of first cash flows in 2014 will attract some market attention just as the conclusion of investment in the Pluto Project and subsequent cash flow propelled Woodside to higher levels last month. Woodside capital expenditure has peaked for now, the cash is flowing and a special dividend was applauded by a market hungry for yield. We see this situation as repeatable in 2015 for Oil Search. The company is the only LNG project in Australia in site of completion.

The obvious hurdles are commissioning risk, oil price and sovereign risk. While we live with oil price volatility on a daily basis, the political situation in PNG is very stable at the moment after a difficult 2012 ; we are confident there will be no troubles in this area. Oil Search was last featured on our website last April; the price had not advanced far since then. We continue to hold the stock as a core position.