Oil Search Limited (ASX: OSH) has bucked the sector's downtrend as its quarterly production report will reinforce analysts' "buy" calls on the stock.
Shares in Oil Search jumped 3.5% to $7.19 this morning when Santos Ltd (ASX: STO) and Origin Energy Ltd (ASX: ORG) are trading 0.4% lower each at $7.51 and $11.21, respectively, as a big drop in the crude price weighs heavily on the sector.
But shareholders in Oil Search brushed aside the 1.5% fall in the West Texas Intermediate (WTI) oil price to $US50.15 a barrel when management reported record quarterly production of 7.41 million barrels of oil equivalent (mmboe) for the three months to end June, which is 7% higher than the previous quarter and 40% ahead of the same time last year.
The ramp up in its PNG LNG Project was the key driver and Oil Search has upgraded its 2015 production forecast to between 27 mmboe and 29 mmboe compared with its previous guidance range of 26-28 mmboe.
What's more, management has managed to lower production costs in the face of declining global energy prices. Oil Search said full year production costs will fall to $US9 to $US11 a barrel compared with earlier estimates of $US10 to $US12 per barrel.
However, Oil Search is not immune from falling energy prices. Total revenue for the quarter dropped 17% to $US391.5 million as gas prices fell 35% over the March quarter although a rebound in crude oil price helped offset some of the loss.
Santos also suffered a drop in revenue when it reported its quarterly last week but its share price fell.
This is because Oil Search is tipped to generate massive amount of cash from the ramp up of its PNG LNG project in the near-term, which will put it in a strong position to pay down its debt of $4.3 billion. Oil Search also has $US750 million in undrawn corporate credit facilities and currently holds $US843 million in cash.
Since PNG LNG started production in April last year, it has exported more than 7 million tonnes of LNG in "take or pay" contracts that oblige customers to pay for the gas regardless of whether they need it.
For this reason, I believe Oil Search is the best placed among the major oil & gas stocks and I see a 20% upside to the stock over the next 12 months.
But if volatile oil prices are keeping you awake at night, sign up below for your free report on the best income stock to own in 2015-16.
