The share price of Oil Search Limited (ASX: OSH) slipped 0.7% into the red at $6.72 after the oil and gas company posted its quarterly production report that showed a dip in total production, but a rise in total revenue.
This could be a good buying opportunity as the production figures are not particularly material to the outlook of the company. The key focus is really on the expansion of its Papua New Guinea (PNG) liquified natural gas (LNG) plant that it is jointly developing with global energy giants ExxonMobil and Total.
Goldman Sachs thinks Oil Search's relentless focus on PNG has paid off with the company now generating strong cashflows from its assets in that country. Oil Search is also well advanced with its gas field appraisal activities and its recent Muruk gas discovery – the largest find of its kind in PNG in many years.
Management gave a pretty bullish assessment of Muruk in the latest quarterly update. It said production testing confirmed a good quality reservoir with high deliverability, which is consistent with the Toro reservoirs in the Central Fold Belt.
In light of the good results, the company plans to undertake a comprehensive appraisal program starting in the fourth quarter.
Meanwhile, Goldman Sachs notes that ExxonMobil is now probably more focused than before on the expansion of the PNG joint venture now that it has bedded down the acquisition of InterOil with an investment decision expected in 2019. This would put that start date of the expanded project in 2023.
Oil Search doesn't need a sharp rebound in the oil price to look cheap either. Goldman Sachs is forecasting the long-term average Brent oil price at US$53 a barrel and that is enough for the expansion project to be worth an additional $1.45 a share.
Goldman Sachs has a 12-month price target of $8 on the stock (remember the expansion doesn't kick in till 2023 so the price target does not capture this upside) and notes there is potential for the valuation to rise if Muruk comes on line.
The broker has also described Oil Search as "the most attractive M&A (merger and acquisition) target" within their Asia Pacific Upstream coverage and it has added the stock to its "conviction" buy list.
Oil Search produced 7.24 million barrels of oil equivalent (mmboe) in the June quarter, which is 4% lower than the March quarter due to maintenance activities, but total revenue is up 16% to US$332.5 million over the same period as it managed to realise a higher gas price.
Management is reiterating its 2017 production guidance of 28.5 to 30.5 mmboe guidance.
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