All eyes on Oil Search now

PNG growth opportunities give Oil Search solid long-term outlook.

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Oil and gas producer Oil Search (ASX: OSH) maintains a lower profile than some of the other oil and gas producers in Australia like Origin Energy (ASX: ORG) or Woodside Petroleum (ASX: WPL). That’s because unlike the last two, Oil Search has only limited operations in Australia, with most of the company’s business undertaken across the gulf in Papua New Guinea.

Oil Search’s total production has been in decline since 2007 as the company’s oil fields reach maturity. But this will soon be reversed with the company’s largest undertaking, its 29% stake in the $18.9 billion PNG LNG project, set to come online in 2014. The project is a joint venture with partners including Santos (ASX: STO) (13.5%), and Exxon-Mobil (NYSE: XOM) (32.2%) and is expected to produce 9 trillion cubic feet (tcf) of natural gas, the equivalent of around 1.5 billion barrels (BBbl) of oil equivalent over the project’s life.

PNG LNG is 80% complete and once online will more than quadruple Oil Search’s output from 6.2 million barrels in 2012 to over 24 million. That will result in significant cash flows for Oil Search, but the company is by no means resting on that. At the company’s AGM last week OSH chairman Richard Lee revealed the company had spent US$146 million on exploration activities in 2012 — a 137% increase over 2011 – investigating new growth opportunities.

Two primary options have been identified by OSH. The first is to capitalize off the infrastructure developed for PNG LNG by expanding it to accommodate the discovery of a new gas field about 80km from its current focus area. The site is expected to hold reserves of 2.5-3 tcf of natural gas and is currently undergoing additional seismic testing.

The second big option lies in the Gulf of Papua where over 30 field opportunities have been identified. Oil Search could again leverage off the new PNG LNG infrastructure in the region, or setup a stand-alone or floating LNG operation. Regardless, further investment in PNG will be well supported by the national government with Prime Minister Peter O’Neill opening the door to more foreign investment in the country’s rich natural gas resources back in March.

Foolish takeaway

PNG LNG, as well as the additional growth opportunities the company has its eye on, provide big potential for Oil Search’s long term future. For investors, OSH is one of the few energy companies where future production seems to have been priced into the company’s shares. At $7.80 the shares are trading at a P/E ratio of 61 on 2012 earnings and 24 by forecast 2014 earnings.

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