The Oil Search Limited (ASX: OSH) share price rose 4% to $6.62 this morning after the company released its half-year results. Here's what you need to know:
- Sales rose 16% to $676 million
- Net profit after tax (NPAT) rose 405% to $129 million
- Interim dividend of 4 cents per share
- Oil and gas realised prices rose ~26%
- Production fell 1% to 14.81 million barrels of oil equivalent (mmboe)
- 12% reduction in operating costs to $8.52/barrel
- Net debt of $2.8 billion
- Outlook for 29mmboe to 30.5mmboe production
So what?
A strong result for Oil Search, although this was primarily driven by one-off costs in the first half of 2016 that weren't repeated this year. That is, the first half 2016 result was artificially low, making this half look much better by comparison as Oil Search benefited from a lower effective tax rate, among other things.
It was good to see the company pay down some debt; including financing costs, Oil Search's 'cash break even' point is at US$29.4 a barrel, comfortably below its realised price of $53 during the half. While oil prices are currently below this level, suggesting profits in the second half may be lower, Oil Search should remain profitable and be able to fund some of its planned expansions.
Now what?
Management reported that Oil Search is seeing considerable interest from buyers looking to lock-in new supply contracts over the short to medium term, in addition to the company's current contracted arrangements. 1.3 million tonnes per annum (Mtpa) is being marketed for 2 year to 5 year contracts, reflecting a significant increase to current contracted sales of 6.6Mtpa currently. With a number of attractive fields close to exist infrastructure currently being explored, Oil Search appears to have a good chance of increasing its reserves and the scale of its operations. New buyers are also emerging for the company's gas.
However, the business remains highly indebted and vulnerable to swings in commodity prices, plus the company carries a whopping price tag of something like 40x full year earnings, depending on the oil price. I like Oil Search and would own it at the right price, but I am avoiding it today.
