May 5 Ian Howarth
Oil Search shares, trading this week at 63¢, have returned to the same value they were in early 1993, before the development of the PNG oilfields.
With Oil Search on the brink of assuming the role of PNG oilfield operator, from which it produced 8.3 million barrels last year, the 10-year share price graph is a depressing sight.
Given that Oil Search only paid its first dividend, US1¢, last year - 73 years after the company was formed - shareholders can be excused for impatience.
But despite the sharemarket's lack of faith, Oil Search may now be in the best position for growth in its history.
Many Oil Search investors thought the Kutubu oilfield discoveries of the early 1990s would be the bonanza they had been hoping for for decades.
That wasn't the case as PNG's notoriously unpredictable and largely unstable government imposed fearful constraints on the company's ability to reap the anticipated windfall.
With Chevron Texaco leaving PNG and Oil Search set to head up operation of the oil and gas assets, the company may finally be able to gain the leverage it needs to make the big step into the ranks of a mid-sized independent oil company.
But it needs a few of the balls chief executive Peter Botten is juggling to land in the right places for Oil Search to make the move.
Deutsche Bank oil analyst John Hirjee summed Oil Search up this week noting that, "Oil Search's share price is held hostage to the fortunes [or misfortunes] of the PNG gas [pipeline] project. Given current share price levels the market is imputing little [if any] value for the gas project."
Ironically, however, the market focus on the PNG gas pipeline project in the past two years has obscured the progress the company has made in other areas. Most importantly, Oil Search's balance sheet is in its strongest position since the company was formed, giving it a good chance to finally deliver on its potential.
At year end, Oil Search held cash and receivables of more than $US100 million ($158 million).
Debt is now around $US100 million and the company has a gearing ratio (debt to debt plus equity) of only 11, giving it substantial financial muscle.
Just to add some cream to Oil Search's solid financial position the company is also negotiating to sell its gold assets, acquired through the merger with Orogen Minerals, and at present worth around $US80million.
That cash and the ability to leverage off it, gives Oil Search substantial financial firepower for a medium-sized takeover, possibly up to $US800 million, if it can find the right target.
The company can handle that sort of debt load with the cash to be generated from its growing oil and gas production.
But if it doesn't deliver, existing investors will be well justified in following the lead of many of the major local institutions that have quit the share register in recent years.
Oil Search posted a record profit of $US55.2 million in 2002 and the trend of strong earnings has continued into the present year with record revenue of $US81.3 million in the March quarter.
Debt repayment of $US30 million in the March quarter was in response to the company's sharp increase in crude oil production in the quarter as well as the strong revenue generated from the higher prevailing world crude prices due to the war on Iraq.
"Production was up for the first time in years," says Botten.
"That reflects all the hard work we have done on [oil well] work-overs and field rehabilitation."
In addition, the company's oil and gas reserves base rose sharply.
At the end of 2002, Oil Search's proven and probable oil reserves stood at 118 million barrels, up from 89.7 million barrels a year earlier, including 2002 production of 8.3million barrels.
The production increases and oil and gold price improvements allowed Oil Search to generate revenue of $US81.3 million in the March quarter, up 5 per cent on the previous quarter.
For the first time, Oil Search now has some serious options for its future and not all of them revolve around the long-delayed PNG to Australia gas pipeline project.
The on again, off again PNG pipeline project has thrust Oil Search into the limelight for the past couple of years, but Botten says the company has many more options to investigate.
It has two serious domestic PNG gas and gas liquids projects under investigation.
Corporate takeovers are also high on the Oil Search agenda given the strong state of its balance sheet, but arching over all the corporate options is the company's core focus on exploration.
The company still has a strong focus on extracting more value from the PNG highlands - which clearly still has major potential for new discoveries - but is now working hard to define drilling targets in Yemen and has just picked up an exploration lease in Egypt.
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