Oil Search Limited shoots the lights out with record LNG production: Is it time to buy?

This morning energy producer Oil Search Limited (ASX: OSH) announced that LNG production was four times greater in its third quarter than a year ago in the same period, thanks to the start of LNG exports from the PNG LNG project earlier this year.

The company said: “Oil Search is currently undergoing a major corporate transformation; the successful start-up of the PNG LNG Project has already started to provide a material uplift in production, profit and legacy cash flows.”

Production and revenue significantly higher

The company was expecting a step-change increase in revenue to transform it into a much larger producer. That came true this quarter when it achieved 6.67 million barrels of oil equivalent (mmboe), an 81% rise from the second quarter.

Total sales revenue was remarkably higher, climbing to US$538.2 million for a 58% gain.

Oil Search shares were down about 1.2% in morning trade after the announcement. The market seemed to have those stunning quarterly results already baked into the price.

Nonetheless, investors should be looking forward to what will happen in the short and mid-term and not at one day’s move.

Dividends expected to rise

One benefit to investors will be higher dividends. The company has approved a new policy for raising the dividend payout ratio to 35% – 50% of the core net profit after tax, or underlying NPAT. In FY 2013, the payout ratio was 26%, so the new payout ratio could mean a 35% increase or more.

Currently, the stock pays a 0.7% yield unfranked.

Further gas field development can support more LNG trains

The PNG LNG project is now at full production capacity with its existing two processing facilities, or “trains” working together. Already Oil Search and the project partners, Exxon Mobil Corporation (NYSE: XOM), Santos Ltd (ASX: STO) and the PNG government are preparing gas supplies for two, possibly three, extra trains.

That suggests production could double again over the next five years. Long-term investors will be best able to take advantage of this growth by building up a position steadily over time.

For even further business expansion, the large projected cash flows from the PNG LNG project will help fund other acquisitions that may achieve higher returns than LNG production. This is a kicker on top of the already bright future of the company.

Oil Search's potential over the next five years is very attractive, but is it your best bet for growth and returns?

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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