ANALYST’S NOTE

OSH fell ~2% after reporting its 1H18 results, which saw NPAT fall to US$79.2m (down -38.7% on pcp) after sales dropped -17.5% to US$557.8m due to the earthquakes in Papua New Guinea in Feb-18.

Management described the half as “one of the most challenging in the Company’s 89-year history”. On a positive note OSH narrowed its full year production guidance to 24 – 26mmboe on improved production outlook in the second half, whilst also narrowing the production costs guidance to US$11-13/boe for FY18.

We maintain our Neutral recommendation. We highly regard OSH’s PNG assets and management team. Whilst some growth projects are long-dated, we note the Alaskan opportunity provides leverage to oil prices and is progressing well.

• 1H18 results. Compared to the pcp: 1. Total production fell -31% to 10.24mmboe, impacted by temporary shut-down of oil search-operated production and PNG LNG project following the earthquake. 2. Average realized oil and condensate price went up +34% to US$71.45/barrel. 3. Average realized LNG and gas price up +18% to US$9.02/mmBtu. 4. Total revenue declined -17.5% on pcp to US$557.8m. 5. NPAT declined -39% to US$79.2 – impacted by earthquake, partially offset by stronger global oil and gas prices, -30% reduction in D&A expense and -51% reduction in exploration expense. 6. An interim dividend of US2cps (vs US4cps in 1H17), representing a payout ratio of 38.5% (within board’s range of 35%-50%). 7. Liquidity includes US$412.1m in cash & US$850m in undrawn credit facilities.
• 2018 full year outlook. Management upgraded FY18 production guidance to 24-26mmboe, while narrowing the production costs guidance to US$11-13/boe. Management left the guidance for other operating costs and depreciation & amortization unchanged and expects total capex for FY18 to be US$435m-530m.
• PNG oil field and associated opportunities. During the presentation management highlighted that there is the potential to extend plateau oil production until 2023-24 and add more than 30mmmbbl to reserves in the coming years (i.e. more than 50% increase in reserves).
• Papua LNG and PNG LNG projects progressing. OSH has reached alignment on the preferred downstream concept for the next phase of LNG development in PNG comprising, potential construction of three LNG trains producing approximately 8 MTPA, with two trains supplied with gas from the Elk-Antelope fields and one train underpinned by gas from the PNG LNG fields and the P’nyang field, all co-located on the existing PNG LNG plant site. The total resources in P’nyang and Elk-Antelope on a 1C and 2C basis have increased to more than 8tcf and 11tcf, following recertification of the P’nyang gas field in 1H18. Management confirmed that the engagement between the State Negotiation Team and PRL 15 and PRL 3, to negotiate gas agreements is underway.
• Alaskan-progressing well. ConocoPhillips carried out an appraisal drilling at the Putu 2 well which delivered strong results with the well now expected to have better reservoir properties, which has indicated that there is potential resource upside within the Pikka Unit from OSH’s previous estimates of 500 mmbbl of 2C contingent oil resource.