Earthquake hits Oil Search profits, dividend cut in half
February's Papua New Guinea Highlands earthquake knocked 40pc off oil and gas exploration company Oil Search's profits
The Papua New Guinean earthquake in February has knocked 39 per cent off oil and gas exploration company Oil Search’s (OSH) 2018 first half profits. Net profit after tax is down to US$79.2 million, compared to US$129.1 million in the first half of 2017.
The firm has announced a 50 per cent cut in 2018 interim unfranked dividend, down to two US cents per share, compared to four US cents per share in the first half of 2017.
The earthquake caused a 31 per cent reduction in production levels, due to a temporary shut-down of both Oil Search operated production and the Papua New Guinea LNG Project following the event.
There was also a 14 per cent increase in production costs in the first half of the year, largely reflecting remediation and other costs associated with the earthquake, net of insurance recoveries and the bringing forward of maintenance programmes during the earthquake shut-down period.
Oil price strength provides respite
Strong global oil and gas prices offset some of Oil Search’s troubles, with the oil price up 34 per cent and LNG and gas prices 18 per cent higher. There was also a 30 per cent reduction in depreciation and amortisation expense due to lower production.
The company confirmed a 51 per cent reduction in exploration expense, reflecting the write-off of two exploration wells in the prior period.
There is good news for full-year predictions too. The company has upgraded production guidance for 2018, based on bsed on the record performance achieved by the PNG LNG Project since the recommencement of production following the earthquake.
Total capital expenditure for 2018 is expected to be between US$435 million and US$530 million.
Mark Taylor, senior equities analyst, Morningstar Australia said that the results were “in line with expectations”
“We were expecting profits of US$87 million, they came in at US$79 million – the difference was non-cash depreciation. This result was down from the prior corresponding period which is due primarily to the earthquake,” he comments.
“Costs associated with the earthquake aren't stripped out – it is not viewed as an impairment or exceptional item."
Noting the dividend was "a bit lower, than we were expecting - we looked for 2.9 cents, they've gone for 2," Taylor suggests this could be a conservative move regarding the earthquake costs.
"The cashflow looks quite strong – but this may be down to timing, they may have caught some insurance recovery cost from the earthquake.”
The share price fell to $9.01 in mid-morning trading but is now $9.06, down 1.74 per cent on open.
More from Morningstar
• Make better investment decisions with Morningstar Premium | Free 4-week trial
Emma Wall is senior international editor, Morningstar
© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.