Oil Search announces record oil and gas production in 2016

OIL Search today announced historical results in the company’s 88 years of investing in PNG, with a record oil and gas production of 30.24 million barrels of oil equivalent (mmboe).

Releasing the company’s full year results for 2016, Managing Director Peter Botten said the strong results were achieved on the back of an excellent performance from the PNG LNG project.

“The increase was driven by an excellent performance from the PNG LNG Project, which produced at an average rate of 7.9 million tonnes per annum (MTPA) during the year, compared to nameplate capacity of 6.9 MTPA.’’

Mr Botten said production from the mature PNG oil fields was also better than expected, due to improvements in facilities uptime and active reservoir management, and commended Oil Search employees and contractors for their contribution.

“Oil Search reported a core profit in 2016 of US$106.7 million. Annual production of 30.24 mmboe and sales of 30.59 mmboe were the highest in the Company’s history, up 3% and 6%, respectively, on last year. This record performance reflected an excellent performance from the PNG LNG Project, as well as better than expected production from our mature PNG oil fields. However, the increase in product sales was offset by lower global oil and gas prices, with the average realised oil and condensate price down 12% and the LNG and gas price 33% lower than in 2015.

“Oil Search continued to focus on its operational efficiencies and cost structure during the year, in response to the ongoing weakness in oil and gas prices. Unit production costs were reduced to US$8.50 per barrel of oil equivalent (boe), 16% lower than in 2015. This is the third consecutive year of material reductions in unit production costs, down from US$12.21 per boe in 2014 and US$10.08 per boe in 2015, representing a 30% decrease over three years.

“This resulted from an increasing proportion of lower cost PNG LNG production, together with a focused and disciplined approach to reducing costs within the Company’s operated business. Oil Search’s cash operating margin in 2016 was a very healthy 69%, a strong result given the challenging oil and gas price environment. Depreciation and amortisation charges of US$13.68 per boe were towards the bottom of the guidance range.

The statutory reported profit for 2016 was US$89.8 million. Profit was boosted by the break fee received from ExxonMobil due to the termination of Oil Search’s bid for InterOil, with Oil Search realising a net profit of US$18.7 million, after costs. This was offset by a one-off, non-cash restatement of deferred tax balances of US$35.6 million, following a reduction in oil field tax rates from 50% to 30%. As a result, the effective tax rate on reported profit for the 2016 full year was 51.5%. Stripping out these items, the effective tax rate was 35.8%.

“Despite the weak oil and gas price environment and ongoing expenditure on value-adding exploration and appraisal activities during the year, the Company reduced its net debt position by nearly US$242 million over the year, highlighting the strength of the Company’s asset base. At the end of 2016, Oil Search had total liquidity of US$1.61 billion. Together with strong cash flows from our operations, this is more than sufficient to fund all current committed activities, including expenditures on progressing our highly competitive LNG expansion opportunities.”

Here are some of the highlights for the 2016 financial year;

  • A record level of hydrocarbon sales was also achieved, 6% higher than in 2015, reflecting higher production and timing of LNG liftings. The impact of higher production and sales on revenue was offset by lower realised oil and LNG prices, resulting in a 22% decline in revenue from 2015 levels.
  • The Company continued to be successful in lowering unit production costs, which fell from US$10.08 per barrel of oil equivalent (boe) in 2015 to a very competitive US$8.50 per boe.Unit production costs have declined 30% since 2014, reflecting the successful implementation of a series of cost reduction programmes and a higher proportion of lower cost production from the PNG LNG Project.
  • Core profit for 2016 was US$106.7 million, a good result given the oil and LNG price environment during the year. Statutory net profit after tax of US$89.8 million included a profit, net of costs, of US$18.7 million from the break fee received from ExxonMobil relating to the InterOil transaction, offset by a one-off, non-cash restatement of deferred tax balances of US$35.6 million.
  • A 2016 final unfranked dividend of two and a half US cents per share was announced, taking the total 2016 dividend, including the interim dividend of one US cent per share, to three and a half US cents per share. This represents a full year dividend payout ratio of 50% based on core profit, at the upper end of the Company’s payout range.
  • The Company continued to build on its quality reserves and resources base during the year; providing a platform for further production growth. Following a resource recertification of the PNG LNG Project fields by independent expert Netherland, Sewell and Associates, Inc. (NSAI), Oil Search’s PNG LNG Project reserves increased materially, up 50% on a 1P (proved) basis and 12% on a 2P (proved and probable) basis. In addition, 253.9 bcf of gas and 13.1 million barrels (mmbbl) of condensate was added to the Company’s 2C contingent gas and liquids resources. This was partially offset by the removal of 21.9 mmbbl of 2C contingent oil and 6.3 bcf of 2C contingent gas reflecting the Company’s exit from the Middle East. At present production rates, the Company’s reserves cover represents a healthy 16 years and 18 years at the 1P and 2P levels, Respectively, while the 2P reserves and 2C contingent resources cover is 44 years.
  • An independent gas certification of the Elk-Antelope fields took place during 2016. The average estimated 2C contingent resource of the two certifiers is consistent with Oil Search’s revised internal estimates. Together with existing resources at P’nyang and the upgrade in PNG LNG reserves, this certification supports Oil Search’s view that there are sufficient gas resources available to support further expansion of PNG LNG production as well as two new PNG LNG sized trains in PNG. Exploration success at Muruk towards the end of the year has further increased the options for development, particularly given the proximity of this exciting new gas discovery to existing infrastructure. Oil Search is committed to continuing to promote a cooperative development agenda. We expect formal discussions between key stakeholders; including ExxonMobil and Total, the operators of PNG LNG and PRL 15 respectively, as well as the PNG Government, to commence in 2017, to ensure the most capital efficient approach to developing the next phase of LNG expansion in PNG.
  • At year end, the Company held total liquidity of US$1.61 billion, comprising US$863 million in cash and US$750 million in available committed funding lines. This liquidity, combined with strong operating cash flows, provides a substantial financial cushion, enabling the Company to pursue its growth initiatives.
  • Oil Search enters 2017 in a strong operational and financial position. Underwritten by a large, high quality reserves and resource base, together with a good cash flow and strong balance sheet, there is an unprecedented opportunity to create substantial value for the Company, its operating partners and PNG through the timely development of PNG’s LNG expansion projects. Delivering on these new developments, as well as optimising the existing producing assets, looking for longer term growth opportunities and maintaining a stable operating environment remain key strategic objectives for the Company.
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