Oil Search tightens the purse strings and focuses on Papua LNG

Oil Search has announced in a recent strategy update that it will continue to reduce costs and pull back on exploration. However, the company says it intends to make the Papua LNG project a priority.

In its latest strategy update, Oil Search’s Chief Executive Keiran Wulff says the company has ‘learned some hard lessons’ in 2020.

Oil Search’s Kieran Wulff.

He says the focus of Papua New Guinea’s largest company will be on near-term operating cash flow and disciplined management of its capital.

‘We have a clear hierarchy for allocating capital, prioritising sustaining capital and a strong, flexible balance sheet. We have stress-tested our portfolio, instilled a disciplined approach to investment decisions and are well progressed in pursuing multiple options to ensure funding readiness for delivering Pikka [in Alaska] and Papua LNG.’

The update points to a 40 per cent decrease in the company’s operating expenditure by 2023 and a 75 per cent reduction in average annual exploration capital expenditure, including no near-term ‘greenfield’ exploration.

Cost reductions will also include infill drilling to boost productivity and solely having ‘in-field exploration relevant to existing operations.’

Papua LNG and P’nyang

While exploration for future prospects is being wound back, Oil Search is bullish on the proposed Total-led Papua LNG project. This project, still be be given the go-ahead, is ‘optimally placed to target supply windows into Asia’, has a competitive cost, and can provide ‘high quality rich LNG sought after by north Asian buyers.’ The ‘favourable location’ in being close to Asia is also considered a differentiator.

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‘LNG will remain a transition fuel of choice,’ the update says, adding that the PNG Government has reaffirmed a ‘strong commitment’ to the Papua LNG Gas Agreement legislative amendments, which passed through Parliament on 11 November.

Wulff reportedly told investors that the strategy will be to focus on the Papua LNG project on its own, initially with two trains at the ExxonMobil-run LNG plant at Caution Bay.

‘There is significant interest from all parties to simplify LNG expansion in PNG and focus on Papua LNG two trains,’ he reportedly said. ‘Comments by Total, the PNG government and the PNG opposition are increasingly supportive of advancing the Papua LNG project.’

While an Memorandum of Agreement has been signed for Papua LNG, the project has get to reach a final investment decision. Early this month, the PNG Government said it was expecting a visit of a ‘high-level delegation’ of Total executives within the next few weeks to ‘put a clear roadmap about Papua LNG going forward.’

Future discussions will ‘focus on [the] P’nyang project,’ which appears now to be uncoupled from Papua LNG, contrary to the initial hopes of partners in both projects.

PNG LNG

Oil Search’s major existing asset is doing well, on the other hand.

The update says that the PNG LNG project, in which Oil Search has a 29% interest, has consistently out-performed, delivering 1.6 million tonnes per annum without additional capital. This is 26 per cent above ‘nameplate capacity’ (intended full-load output) and the project ‘has capacity to accommodate additional trains.’

Net cash flows for PNG LNG are expected to more than double by 2027 after financing is finally repaid in 2026.

On the financials, Oil Search completed a US$700 million (K2.47 billion) equity raising in April to strengthen its balance sheet. The company’s share price has fallen from $A7.07 at the beginning of the year to $A3.79 on November 24, a drop of almost half.

According to the Chief Financial Officer Stephen Gardiner, operating costs in 2020 have been reduced by US$90 million (K318 million) – a 20 per cent reduction. Capital expenditure has been reduced from US$710–845 million (K2.5–2.98 billion) to US$390–460 million (K1.38–1.62 billion).

‘PNG LNG maintained positive cash flow despite oil prices,’ the update says. It points to ‘significant production uplift with substantially reduced capital expenditure.’

Oil Search’s long term target is to reduce gearing (debt) to 25 per cent noting there is a ‘clear pathway for significant deleveraging about 2025’. The company will also consider using hedging strategies to manage oil price risk. The aim is to have a dividend payout policy of 35-50 per cent of core net profit after tax (NPAT).