Earlier in the year, I wrote about Oil Search Limited (ASX: OSH) and its curious nature. Despite being one of Australia's 50-largest companies by market capitalisation, its dividend and revenues are pitiful, and its debt is enormous.
The company also appears to be a case of eager shareholders buying in the hope of future profits, as its price-earnings ratio of 44.48 (down from 60.74 three months ago) is enough to frighten any value shopper.
Thankfully for investors, the company's massive LNG expansion is nearly finished – roughly three months ahead of schedule –and this will deliver the promised fruits sooner than expected. Total oil production should be at the top of the previously forecast range, assuming a trouble-free commissioning at the PNG plant.
Even more promising is the company's March acquisition of a share in the 'Elk/Antelope' resource, which could contain up to 7 trillion cubic feet of gas. Add this to Oil Search's existing reserves of some several-hundred million barrels of oil, and you have a first class resource company.
Unfortunately much of this is already included in Oil Search's share price, which is lofty enough to harbour a considerable amount of earnings increases.
Those looking for LNG and oil exposure might consider any of a number of other domestic producers like the majors Woodside Petroleum Limited (ASX: WPL) and Santos Limited (ASX: STO), or smaller producer Beach Energy Limited (ASX: BPT). All three are ramping-up production and exploration efforts, and pay a better dividend at a fairer price.
There's also a story doing the rounds of the news websites that Woodside is considering making an Oil Search takeover offer to boost their short-term LNG growth potential. While it could be a sound move, an Oil Search spokesperson confirmed they knew nothing of any takeover offer, making it speculation at this point. If a concrete offer materialises, you could cover both bases by buying the company that buys Oil Search.
Foolish takeaway
As a cautionary word, it is worth noting that analyst Morningstar lists Oil Search's fair value as around $5.50 to $6, it currently trades at $8.75. They also draw attention to the significant risks associated with the sovereignty of Papua New Guinea, a poor nation with limited infrastructure. That nation's recent acquisition of 10% of Oil Search after a limited rights issue also raises concerns which I cover in this article.
For long-term Oil Search shareholders, you're probably doing yourself a favour by continuing to hold, as the next few years are when the company will begin to repay its promise.
