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Is this the best stock to own in the oil and gas sector?

The share price of Oil Search Limited (ASX: OSH) is defying weakness in the sector after management released its quarterly report and upgraded its full-year production guidance.

The stock added 0.6% to $8.56 in morning trade as the energy sector slipped 0.5% into the red with Woodside Petroleum Limited (ASX: WPL) slipping 1% to $35.41 and Origin Energy Ltd (ASX: ORG) tumbling 1.9% to $7.76.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index is down 0.3% at the time of writing.

The impressive 39% increase in Oil Search’s production to 7.53 million barrels of oil equivalent (mmboe) was outpaced by an 81% surge in revenue to a near four-year high of US$4749 million for the September quarter when compared to the previous quarter.

The strong performance was driven by record daily rate production from Oil Search’s PNG LNG joint venture (JV) project as well as strong crude oil prices. The liquified natural gas (LNG) price is positively correlated to crude although there tends to be a lag effect.

The better than expected recovery in PNG LNG following the earthquake in February this year has prompted management to increase its 2018 production guidance to between 25 mmboe and 26 mmboe from its initial estimate of 24-26 mmboe.

Investors should also be pleased that cost inflation that’s afflicting the broader market is under control at Oil Search. Management has narrowed its full-year unit operating cost to US$11.50 to US$12.50 per barrel of oil equivalent (boe) from its previous forecast of US$11 boe to US$13 boe.

The company also had some positive exploration results in the quarter. Its Barikewa 3 appraisal well in the Forelands region of PNG successfully intersected gas – confirming good reservoir quality in the target intervals.

This is on top of the positive results from the Kimu 2 appraisal well, which proved up the extension of the Kimu gas reservoir in May.

The latest production result will give supporters new reason to bid the stock higher in a market that’s anticipating stronger for longer oil prices.

Geopolitical tension between Saudi Arabia and the western world, including the US, is the latest driver for the oil price.

Oil traders were already nervous about the potential lack of supply as doubts emerged over the past month about Saudi Arabia’s ability or willingness to ramp up production to meet the anticipated shortfall as Iranian and Venezuelan crude supplies are removed from the market.

The energy sector has outperformed the broader market over the past year and I believe it can continue to hold its lead into 2019.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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