Oil Search Now A Reserves Story

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In production terms the quarterly result from Oil Search (OSH) contained little in the way of good news according to ABN Amro, as production guidance for the year has been cut by around 10%.

This has led to a flurry of earnings downgrades for the stock but not a single rating change, as Credit Suisse points out the company is now a reserve play rather than an earnings story given the potential development of an LNG project in Papua New Guinea to take advantage of the company's more than one billion barrels of oil equivalent gas reserves.

Looking at the earnings adjustments, Credit Suisse has cut its earnings per share forecasts for FY07 by 15% to 19c and in FY098 by 6% to 18c, while ABN Amro's estimates now stand at 21.5c and 16.3c respectively and JP Morgan's at 15.2c and 15.5c.

This shows the market is now in line with management's guidance of flat output through FY08, before an increase of around 10-15% in FY09. JP Morgan suggests this new guidance is disappointing but is really only a deferral of production rather than lost production, so it doesn't change the fundamental story.

Credit Suisse remains cautious as it sees some risk to this uplift in output coming through, while suggesting any share price weakness resulting from the production report would offer an opportunity for investors to position themselves for the longer-term story.

It could be a while before the potential gas to LNG project partner Exxon appears to be suggesting materialises, so ABN Amro sees the stock as a 12-18 month re-rating story. It also notes exploration success in Egypt appears to offer some chance for the company to diversify its reserves, but again points out it will require investors to be patient in waiting for results to flow through into share price appreciation.

This appreciation could eventually be substantial as Credit Suisse estimates the LNG project could be worth as much as $1.00 per share over the longer-term. Macquarie also sees it as the main share price driver, which is enough for the broker to maintain its positive rating.

Overall the FNArena database shows the stock is rated as Buy six times, Hold twice and Reduce once, with an average price target of $4.61. This compares to the median price target according to Thomson One Analytics of $4.42.

With the market down heavily this morning shares in Oil Search are weaker and at $11.55am were trading 14c lower at $3.98.