Oil Search targets PNG gas deal by year-end as production guidance cut
Oil Search's revised target of a year-end deal with Papua New Guinea's government – which could put an end to delays at a $US14 billion ($20 billion) LNG project – has only partly offset the disappointment over a cut in full-year production guidance.
Outgoing managing director Peter Botten said discussions with the PNG government on the accord, which would set fiscal terms for the development of the P'nyang gas field, resumed late in the September quarter.
The talks had been targeted to conclude earlier this year but were interrupted by a decision from the new PNG government, led by James Marape, to review an earlier but related deal for the Papua LNG project. Both accords are needed before the LNG expansion can go ahead.
While the Papua LNG agreement has since been confirmed by the new government, the interruption has delayed a decision by Oil Search and its partners ExxonMobil and Total SA to start engineering and design work on the expansion, involving three new LNG processing trains in all.
"Discussions between the PRL 3 Joint Venture and the PNG government on the P’nyang Gas Agreement recommenced late in the third quarter, with the agreement targeted to be signed before year-end," Mr Botten said in Oil Search's quarterly report.
A similar decision is expected this quarter to start design work on Oil Search's Alaskan oil project. The go-ahead for both projects would kick off the next expansion phase for the oil and gas producer.
But the quarterly report also revealed the impact of damage to Oil Search's oil loading equipment in the Gulf of Papua, which hit production in the September quarter and triggered the reduction in full-year guidance.
Shares in Oil Search slid 1 per cent to $7.09 on Tuesday.
While the damage to mooring chains has been repaired and production is improving to normal rates, Oil Search has lowered its forecast for full-year output of oil and gas to between 27 million and 29 million barrels of oil equivalent (boe), from a previous forecast of 28 million to 31 million boe. September quarter revenues dived 24 per cent from the third quarter last year.
Cash flow could double
Bernstein Research analyst Neil Beveridge described the quarter as "messy" but highlighted the progress towards the LNG and Alaskan oil projects.
He believes the two projects will double Oil Search's operating cash flow to $US2.3 billion by 2025, assuming an oil price of $US70 a barrel. That puts the stock on a long-term ratio between price and cash flow of three times, underpinning Bernstein's outperform call.
But JPMorgan analyst Mark Busuttil said he was concerned over the timing of the LNG project and pointed to the potential for the start of production to go beyond 2025.
Guidance for full-year production costs has also been increased because of the cost of the repairs and a lower-than-expected payout on insurance for last year's earthquake damage.
Expected capital expenditure has already been cut owing to the delay in the LNG design work, and the total investment for 2019 is now put at $US823 million to $US883 million, down from an earlier estimate of as much as $US1.06 billion.
The disruption to production caused by the problems at the loading facility reduced production in the September quarter, with output at 6.81 million boe, 10 per cent down from the year-earlier period. Mr Busuttil said the production figures were "below estimates" while the revenues of $US361.1 million also fell short of the bank's expectations.
Oil Search announced last month that Keiran Wulff, president of its Alaskan operations, would succeed Mr Botten, who is retiring early next year after more than 25 years as CEO.