What: After a long run-up period, Oil Search Limited (ASX: OSH) has finally completed its flagship PNG project that will be the foundation of its earnings going forward.
That LNG plant came online in April this year, just in time to begin contributing earnings to the half-yearly numbers released recently.
Although the LNG project represents the realisation of substantial value for long-term shareholders, I don't think Oil Search presents much of a buyer's opportunity at the present price.
The reasons behind that call I'll get to in due course, but first here are some points of interest from the half-yearly report:
Highlights:
- Total production up 68% to 5.369 million barrels of oil equivalent (mmboe)
- Total sales up 41% to 4.737mmboe
- Revenue up 34% to $510 million USD
- Net profit after tax up 34% to $152.5m USD
- Total cash operating costs of $22.83/barrel, down from $24.36 previously
So what?
Oil Search also expects to increase the 2014 final dividend released later this year, and predicts that operating costs per barrel will fall further now that the company's two LNG trains are operating at full capacity.
With enormous commercially viable reserves, Oil Search has the potential to become one of the ASX's biggest oil producers.
The Elk/Antelope gas fields in particular provide a way for the company to create a second flagship asset to further multiply earnings for shareholders.
However, utilisation of this asset is some years in the future, and will require extensive cash outlays to bring the project to fruition.
Now what?
Although Oil Search has successfully delivered its PNG project on time and is now reaping the benefits; the company is still not a buy at current prices with a forward P/E ratio estimate of 28 (down from over 50 not all that long ago) making it look quite expensive.
Analysts at Morningstar indicate that 'fair value' for Oil Search is around $6 dollars, and while I think that is a little pessimistic, the company does indeed look overvalued.
There will come a time when earnings, price, and future earnings potential find themselves in a more agreeable arrangement, and when that happens I will be among the first to jump on the Oil Search wagon.
For now however I would counsel shareholders to continue holding, and potential investors to look at other oil companies – there are some great ones out there trading at decent valuations.
Several of them are included in The Motley Fool's recent report into the black gold, which we're giving out free to help Australia invest better.
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