Oil and gas producer Oil Search (ASX: OSH) has reported a 2% fall in production for the half year ending 30 June 2013. The lower production rate coupled with an average 6% decline in the realised oil price at US$108.58 per barrel together resulted in a 4% fall in revenues for the company.

Thanks to lower exploration expenses and a lower tax expense however, the firm was able to post a 6% increase in net profit after tax to US$113.5 million. Operating cash flow was also strong, up 8%, to US$214.3 million.

The key PNG LNG project was described by management as having made “excellent progress during the first half of 2013” with only 40 kilometres of mainline pipeline left to weld and commissioning of Train 1 underway.

Management’s comments regarding the PNG LNG project are very pleasing for Oil Search shareholders as the commissioning and start of production from this project is a “game changer” for the company. Santos (ASX: STO) shareholders will also be pleased to note Oil Search’s update on PNG LNG given that Santos has a 13.5% stake in the project.

Foolish takeaway

Oil Search currently only pays a “token” 2 cent dividend, which is fully underwritten on account of the large expenditure still required to complete the LNG project. Shareholders will be expecting a significant boost to dividends once production starts to flow from the PNG LNG project, however distributions will be balanced by funding requirements for the pipeline of other growth projects still available to the company.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.


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