Oil Search recently announced a US$700m equity raising consisting of a share placement and a rights offer, both at $2.10 a share (a 23% discount to the previous closing price). Ord Minnett believes the capital raised, as well as the deferral of the US$300m debt refinancing due in September 2020, should provide enough comfort to look through the company’s near-term balance sheet concerns.
According to the release, pro-forma gearing will be 28%, with Oil Search having enough liquidity to December 2021 at a Brent oil price of US$20/bbl. There is still risk around covenants as the company indicated the potential for non-compliance at December 2020 should oil prices average in the low US$20s. Looking further out, management will likely defer more capital to support the balance sheet should prices remain weak over the medium term.
Oil Search has prudently addressed the balance sheet, but the unfortunate consequence of the rapid downturn in oil prices is that the company has raised up to 36% of its market capitalisation at a price well below our valuation.
Overall, we believe Oil Search’s low-cost assets and decent organic growth prospects through the Papua New Guinea (PNG) expansion and the Nanushuk operation in Alaska make it one of the more attractive stocks in the sector. At this stage, we still project the PNG LNG expansion project commencing in CY26, with capital expenditure from the second half of CY21. We also assume early-stage production in Alaska from CY22 with a new process plant built by CY24.
We note 1) Oil Search’s assets remain high-quality, 2) there is corporate appeal, and 3) the stock is trading below our net present value. We have upgraded our recommendation to Accumulate from Hold, although our target price has reduced to $3.40 from $3.50.