Oil Search announced it will exercise its option over its existing Alaska assets, known as the ‘Armstrong option’, and indicated a resource upgrade would occur prior to front-end engineering design (FEED) following the analysis of recent drilling results.
The option will be exercised for US$450m, to be funded from existing corporate facilities. Out of the assets being acquired, the key interests are the remaining 25.5% stake in the Pikka Unit and 37.5% in the Horseshoe Block. After option exercise, and before a planned sell-down, Oil Search and remaining joint-venture partner Repsol will align interests to ensure Oil Search has a 51% stake in each asset. A net payment of US$64.3m will be received from Repsol, with Oil Search retaining operatorship.
Oil Search also indicated it expects to announce a “material upgrade” to the Pikka and adjacent field resource estimate – which is currently 500m barrels of oil equivalent on a best-estimate-contingent basis, prior to FEED decision. FEED is scheduled to take place in the second half of CY19, with final investment decision expected in mid-CY20.
Following the maturation of the Pikka opportunity, the company is now targeting first production of 30,000 barrels per day (bpd) gross in CY22. We had previously forecast 100,000bpd gross, starting in CY23. Oil Search will then target the development of dedicated facilities to increase production to about 120,000bpd gross, starting in CY24.
In our view, the resource upgrade and potentially earlier first oil were positives. The disclosure of an earlier conditional offer for the Alaskan assets was also encouraging, although we remain concerned about the prospects for the Papua New Guinea LNG expansion project. We have updated our valuation to allow for a post-option sell-down of interests to 35%, which will provide about US$450m to Oil Search, leading us to raise our target price to $7.90 from $7.80. With the stock trading in line with our target price, we maintain our Hold recommendation.