P’nyang boosts Oil Search

Papa-New-GuineaThe Quest portfolio continues to hold Oil Search as a core holding.  Oil Search holds 29% of the Exxon managed Papua New Guinea  Liquified Natural Gas Project which is due to deliver first gas from the PNG highlands to Port Moresby in 2014. The budget for the project is $16 billion and includes development of gas fields in the PNG highlands, a pipeline all the way to the coast, a further pipeline across the gulf and development of a massive two gas train plant a few kilometres west of Port Moresby.

The key to this investment is the discovery of further gas deposits to allow a 3rd and possibly 4th train development. The availability of a third train delivers huge economies to bulk operations of this kind as infrastructure; wharf, pipelines, offices and an airstrip will already built. The return on the third gas train is therefore much higher than trains 1 and 2.  The LNG sales from trains 1 and 2 are fully contracted to Asian buyers including Sinopec, TEPCO and Osaka Gas.

Our investment hypothesis assumes the 3rd train will be built and this view was recently endorsed by the discovery, earlier this year, of a large gas zone at the P’nyang South. This discovery increases the likelihood of a 3rd gas train being developed. During the balance of this year, further drilling at various sites will continue including the Hides and Trapia fields.

Oil Search are also looking to sell down interests in offshore areas in the Gulf of Papua to help fund further development of these areas. We anticipate some news on this process in the middle of the year.

While the share price has touched $7.50 twice in the last year, Oil Search has pulled back below $7 once again. We see good upside in this stock which combines the strength of the Exxon LNG capabilities with the long history that Oil Search has achieved managing the unique issues that arise in PNG.