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The PNG LNG project set to change Oil Search’s fortunes

Papua New Guinea based, oil and gas producer Oil Search (ASX: OSH), has announced its third quarter result to the end of September. Although the result was positive with few surprises, it is clear that all investor anticipation is centred around the company’s 29% holding in the US$19 billion PNG LNG project.

Production for the quarter was up 34% year-on-year from 1.33 million barrels of oil equivalent (mmobe) to 1.78 million. This compares to Santos (ASX: STO) total Q3 production of 13.4 mmobe and Woodside Petroleum’s (ASX: WPL) 29.1mmobe.

The higher production helped Oil Search to a 62% lift in operating revenue year-on-year to US$175 million. The vast majority of this revenue (82%) came from oil sales, while just 12.5% came from gas. This is where the PNG LNG project is set to change Oil Search’s fortunes.

The project is estimated to produce 6.6 million tonnes per annum over its 30 year life. Oil Search’s 29% stake, is set to see the company achieve a fourfold increase in production and a similar impact in cash flows.

It is this cashflow growth that investors are eagerly anticipating. Shares in Oil Search are up 22% this year, well outperforming the S&P / ASX 200 Index (Index: ^AXJO) (ASX: XJO) which is up 13.7%. Oil Search has been outpaced by fellow PNG LNG partner Santos, shares in which have shot up 34%, but Santos has its own significant PNG project as well with Queensland’s GLNG.

The big question is does the share price have more to run? At its current price of $8.65 per share the company’s near-term growth is well and truly priced in, leaving little value and plenty of risk for new investors.

It puts the company on a trailing price to earnings ratio of 62, or 15.5 once earnings quadruple as anticipated. But with unidentified growth options, after that it’s hard to envisage where the next phases of growth will come from for long-term success.

Foolish takeaway

Oil Search produced a sage performance for Q3, with higher production and sales and has maintained its full year production guidance for the year of between 6.2 – 6.7 mmboe. Current investors will be pleased, but prospective investors may want to wait for a lower share price, before buying it for themselves.

Oil Search is expected to significantly grow earnings over the next three years, but for The Motley Fool’s favourite income idea for 2013-2014 grab our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.

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Motley Fool contributor Regan Pearson does not own shares in any company mentioned.

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