Here's why Oil Search (ASX:OSH) just slashed its dividend

The Oil Search Ltd (ASX:OSH) share price is up more than 7% today following the company's earnings report, despite a dividend cut

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The Oil Search Ltd (ASX: OSH) share price is on fire today. At the time of writing, it is up 6.3% to $4.31 a share. OSH shares closed at $4.07 each yesterday, but opened at $4.21 this morning and rose as high as $4.42 just after open. However, the share price has settled this afternoon to the current price.

The catalyst for these moves higher was the release of the company's earnings report covering the full 2020 calendar year this morning before the market open.

What did Oil Search report this morning?

2020 was a rough year for oil companies, and this is reflected in Oil Search's results today. The company reported that revenues of US$1.074 billion, down 32% from 2019's US$1.585 billion. Despite that drop in revenues, Oil Search managed to increase oil production to 29.02 MMboe (million barrels of oil equivalent). This is up 4% from 2019's 27.95 MMboe.

Earnings Before Interest, Taxes, Depreciation, Amortization, and Exploration Expenses (EBITDA) came in at US$721.1 million, down 37% on 2019's US$1.146 billion. That swung Oil Search's net profit after tax (NPAT) metric to a loss of US$320.7 million for the year. This was down 203% from a net profit of US$312.4 million in 2019.

On the 'core NPAT' metric, the company reported a profit of US$22 million. This was down 93% from 2019's US$320.9 million.

However, Oil Search has managed to put a dent in its net debt over the year. The company reported net debts of US$2.983 billion in 2019. In 2020 this figure was reduced by 20% to US$2.376 billion.

Even so, investors might be disappointed with the final dividend Oil Search is putting on the table. The company has announced it will pay a final dividend of 0.5 US cents per share. That's down 89% on the 4.5 US cents per share final dividend Oil Seach paid out last year. If annualised, that dividend would equate to a forward yield of roughly 2.9% on the current share price and exchange rate.

The company reports that this dividend represents a payout ratio of 47% of core NPAT. Oil Search's dividend policy is to return between 35-50% of core NPAT to shareholders.

Looking forward to 2021

Managing Director of Oil Search, Dr. Keiran Wulff, had a few interesting things to say about the company's outlook for 2021:

We have entered into oil price hedges to reduce the Company's downside exposure to oil prices over the balance of 2021. We have locked in a floor price of US$55 per barrel covering nine million barrels of oil equivalent production over the period from May to December 2021… With this hedge arrangement, we have not limited our exposure to further oil price appreciation…

Whilst we are encouraged by the recovery in the oil price over the last few months, particularly given our strong cash flow and earnings leverage to higher prices, the Company remains focused on maintaining discipline in both our capital management and in cost control across our operations.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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