12 months ago analysts and brokers spoke of Oil Search Limited (ASX: OSH) as the best medium-term income option in the resources sector. The company's 29% stake in the 6.9 million-tonne per annum PNG LNG project started delivering revenue in 2014 and with the oil price at over US$100 per barrel at the time, analysts predicted that Oil Search would be producing a dividend yield over 8% by 2016 or 2017.
That's now looking unlikely.
A Big Disappointment
Investors that bought into Oil Search at that time have lost up to 25% of their capital and the dividend outlook has been significantly scaled back as the oil price plunged to below US$50.
The small consolation prize for investors is that their loss is much less than shareholders in rival firms like Santos Ltd (ASX: STO), who have lost over 50% over the last six months.
Incorrect Forecasts
Now, we can't place all the blame on analysts, after all essentially no one in the whole world correctly forecast that the oil price would crash around 50% over the space of just a few months.
The most recent analysts' estimates of Oil Search's net profit for the 12 months to 31 December 2015 is just a little under $600 million, representing earnings per share of approximately 39 cents. In June last year the same analysts were predicting a net profit of nearly $1.1 billion and earnings per share of nearly 70 cents.
Analysts now expect Oil Search to pay out 50% of profits to shareholders, or 20 cents per share, representing a dividend yield of 2.6% unfranked. Combined with economists' predictions for a prolonged spell of low oil prices, Oil Search no longer looks like a genuine dividend stock.
Foolish investors would remember The Motley Fool's warning about the coming decline in resources stocks over the last 18 months. The Foolish investing business looks for companies that have a great chance of being bigger and better in 10 years' time, which is always difficult to say for resources companies.
