Oil Search Swings to Loss on Impairment Hit
By Robb M. Stewart
MELBOURNE, Australia--Oil Search Ltd. (OSH.AU), the Papua New Guinea-focused energy company that last year rebuffed a takeover approach from larger Woodside Petroleum Ltd. (WPL.AU), swung to a loss last year as it booked an impairment charge on exploration efforts in Kurdistan.
The charge added to the pressure the company was under as oil and natural gas prices continued to slump, offsetting surging production.
Still, the company said it began the new year in a strong position, with its operations in Papua New Guinea generating positive free cash flow that makes expansion there likely even as doubts are cast over rival gas-export developments in Australia and elsewhere.
Oil Search's 2015 recorded a net loss of US$39.4 million against a profit of US$353.2 million the year before. Revenue for the year was 1.5% weaker at US$1.59 billion, although sales volumes surged 63% to more than 29 million barrels of oil equivalent as a gas-export plant on Papua New Guinea operated by Exxon Mobil Corp. (XOM) continued to ramp up production.
Earnings for the last year were held back by a US$399.3 million impairment charge against the full book value of an exploration operation in Iraq's Kurdistan region following disappointing drilling results. That follows a US$129.6 million impairment hit in 2014, largely against exploration assets as energy prices fell.
Stripping out the impairments, earnings were 25% lower at US$359.9 million in what the company said had been one of the most challenging years in recent history for the oil and gas industry.
The drop in prices has slammed many of Oil Search's Australian rivals. Woodside last week said its 2015 profit dropped 99% to US$26 million after it booked US$1.1 billion in impairment and one-off charges, while Santos Ltd. (STO.AU) saw its loss for the year swell sharply thanks to charges against the value of gas-producing assets in Australia's Cooper Basin and other operations.
Woodside also cast doubt on the development of a proposed floating liquefied natural gas operation off Australia's west coast, after Chief Executive Peter Coleman said it wasn't the time to be "reckless" with capital and declined to reiterate expectations a final investment decision would be made later this year.
Oil Search, which is listed in Sydney and has been operating in Papua New Guinea since 1929, said it would continue to cut costs this year but wouldn't book further impairments against other assets after they were assessed against a range of oil prices.
The company's main asset is a 29% stake in Exxon's US$19 billion liquefied natural gas project in Papua New Guinea, known as PNG LNG, which began producing in April 2014. It also owns other assets, including an almost 23% stake in the prospective Elk-Antelope gas field in Papua New Guinea being developed by Total SA (TOT).
In December, Woodside abandoned an attempt to build a regional oil-and-gas champion with the purchase of Oil Search, which had rejected the offer as too low. When it was made in September, the approach valued Oil Search at 11.6 billion Australian dollars (US$8.38 billion).
Oil Search Managing Director Peter Botten said there was a high probability the expansion of the PNG LNG project as well as the Papua LNG venture that will tap the Elk-Antelope field would push ahead to a final investment decision while other proposed LNG projects are delayed or deferred.
With the fall in its underlying earnings, Oil Search said it would pay a final dividend of US$0.04 a share for a full-year payout of US$0.10, down on the US$0.14 paid last year that included a special dividend of A$0.04.
