OSH 1.29% $3.94 oil search limited

chairman's address

  1. 840 Posts.

    Possibly one of the best investments on the ASX - plus heaps of blue sky if the pipeline gets over the line.

    Friday 30th May 2003


    2002 was a momentous year for Oil Search - one of substantial achievement by almost any measure. It was a year of records. Firstly, the Company achieved a record after tax core profit of more than A$100m and, after write-offs, a record profit of A$87m - by far and away the largest in the Company's 74 year history.

    Records were also achieved for earnings per share, operating cashflow per share, record shareholders funds, record oil reserves and near record production. These impressive figures were also backed up by world-class safety performance across the organisation, with zero lost time injuries in our operations in 2002.

    On a year on year basis, core operating profit rose by 213%, operating revenue was up 92% on the previous year, oil production rose by 22%, earnings per share by 20% and operating cashflow per share by 75%.

    As well as this, the Company's Balance Sheet was significantly strengthened, with net debt declining by more than US$43m, to where it stood, at the end of December at US$131.3m - a modest gearing of 14.3%. I should say that performance through May 2003 has also been outstanding, with increasing production and record quarterly revenues buoyed by strong commodity prices. Debt now stands at less than US$100m.

    The Company also instigated a number of capital management initiatives, based on 2002 performance. We reinstituted a dividend payment for all our shareholders. Based on continued stability of commodity prices, this will be a sustainable programme to provide increased returns to all of you.

    The Company also began a share buy-back programme of up to 10% of the share capital. Directors believe that the present share price does not reflect the core value of our producing l assets, even at prices substantially below those presently being realised. The price clearly does not reflect any value for our major gas resource or exploration portfolio. The buy-back of Oil Search shares represents an efficient way of acquiring developed oil reserves at a discount to their real value, on behalf of all shareholders

    The Company's share price is also impacted by negative sentiment and frustration at lack of progress on the Pipeline Project and by any negative views about the Papua New Guinea investment environment. It must be emphasised that the present share price does not reflect any value for the gas and indeed is at a discount to the developed oil value of our oil and gold assets. The buy back will continue at around the current share price.

    We will never underestimate the challenges of doing business in Papua New Guinea. Although our extensive experience here makes us bestqualified to manage these issues and risks, our 2002 record results highlight that if you manage these risks, excellent results can be achieved. The investment environment remains difficult, however, recent initiatives and fiscal change by the Somare Government have made a positive impact. We believe that continued strong financial performance, increased profitability of our core producing areas, continued exploration and a range of new development opportunities will be reflected in a re-evaluation of our share price in 2003.

    All this means that the Company has never been in better shape, by almost any test, giving us a strong platform to develop your company and provide you with material returns during the next few years.

    This is a substantial change in the Company's situation over the last few years and the future outlook for further growth is very positive.
    A core focus for 2002 was a major Strategic Review, carried out by our staff, augmented by specialist independent consultants to review performance, highlight the strengths and weaknesses of our organisation, identify the value potential of our assets and define the programmes and initiatives to capture that value, thus improving returns to shareholders. Our core objective is to be a top quartile performer in the Australian Stock Exchange top 100 companies within a four to five year period, in terms of total shareholder return. This is a challenge for any resource company. However, our Strategic Review identified significant potential value in our assets in Papua New Guinea and elsewhere which, if managed well, can deliver the required value growth to meet our objectives in this time period.

    The Strategic Review highlighted that to deliver this growth we have to change the way we do business in Papua New Guinea. It demonstrated a clear need to take greater control of our assets, through operating key licences.

    The recent unanimous vote by our licence partners for Oil Search to assume the operating role in all the oil fields in Papua New Guinea was an historical step forward for the Company and for the country.

    It is unique in Papua New Guinea that a national company owns over 50% of a major industrial operation in the country. Oil and gas production makes up almost 30% of the country's Gross National Product and represents around 30% of its export income. Oil Search owns over half of this and by the end of this year will be responsible for operating the core of this business.

    This is a real achievement for Oil Search and Papua New Guinea. It is the first time a Papua New Guinean organisation has demonstrated the technical, commercial and financial capacity to operate and drive aworld-class industry in this country. We should all be proud of this achievement and the faith that our Partners have shown in backing us into this national enterprise.

    I would like to pay tribute to the achievements of ChevronTexaco, the Operator of the major oil fields, for their tremendous efforts in developing the oil and gas business in Papua New Guinea, developing Kutubu, Gobe and Moran, along with a world-class group of national and expatriate staff that provide a tremendous platform for Oil Search to further build the business here.

    I would like to send a message to the ChevronTexaco staff that theyare valued very highly by Oil Search and that they, along with ourexisting people, will form a world-class team to drive investment and further growth of this critical industry in Papua New Guinea. I would like to reiterate Peter Botten's message to you last week: You are of real value and are essential to our further development.

    The Strategic Review highlighted the need to have greater control of the business in which we own a majority share. With Operatorship comes significant responsibilities and opportunities. Our Strategic Review highlighted a range of initiatives to increase value in our assets. These are already having a significant impact. Our Field Asset Teams, which include Oil Search staff seconded into Chevron Texaco's organisation, have been successful in increasing production at Kutubu, Moran and Gobe. Other initiatives are focusing on reducing drilling costs, development of presently marginal oil fields, such as Mananda / SE Mananda and commercialising our vast gas resources through a pipeline to Australia, as well as developments for local Papua New Guinean use and possible export.

    Oil Search will play a lead role in developing gas based industry opportunities in Papua New Guinea and our preliminary results of this work have proven encouraging. Our Company will work with our Joint Venture Partners, Government and Landowners to increase investment, development and exploration activity in the country, playing a key role in developing the country's natural resources. Increasing shareholder wealth for Oil Search will lead to wealth creation in Papua New Guinea and an increase in delivery of services to country areas.

    It is significant to note that ten years ago Oil Search had around 25 staff and 7% of the business here. By the end of 2003, the Company will have over 55% ownership of the industry and around 800 staff - a stellar growth performance for a Papua New Guinean National Company, indeed any Company.

    Oil Search now has a range of development and growth options for both oil and gas. Although not nearly as dependent on development of the Papua New Guinea to Australia Project as it was three years ago, this is still the biggest potential project ever in Papua New Guinea and remains essential for the long term growth of the country.

    2002 was a mixed year for the project. The withdrawal of AGL from purchasing gas from Papua New Guinea was a significant setback, but it attests to the resilience and dedication of our people and ExxonMobil. Unlike some Australian gas projects, the PNG Pipeline could reconfigure and continue to work to deliver a potentially viable development.

    To meet the market window in this time frame, the Project is being actively managed to a go/no go decision in the next few months.
    Intense marketing continues with a range of customers in Queensland, the Southern States and the Northern Territory, in order to confirm sufficient gas volumes for Project sanction. Oil Search is taking an active role in trying to conclude these arrangements. I would like to express our appreciation to Minister Avei and the PNG Government for their active support for the project over the year. The present Government has also been proactive in amending the fiscal terms relating to oil and gas exploration and development, initiatives that have improved Papua New Guinea's investment competitiveness and the outlook for further sustained investment. This was done at a difficult budgetary time and they should be congratulated.

    A focus area for industry and government over the next twelve months must be to address the issue of landowner benefits distribution.
    After over ten years of production it is time for all stakeholders to review the system and ensure the benefits are reaching all the right people and that they are underwriting sustainable wealth creation in landowner groups.

    Some words on Corporate Governance: A misguided dissident group has raised the issue of Corporate Governance by Oil Search and other Papua New Guinean companies. Excellent standards of Corporate Governance are essential in all companies but are especially essential in a developing country, where standards may be considered more flexible. I am pleased to say that an independent survey of Corporate Governance Practice, carried out early this year, gave Oil Search a four star rating, on a par with Woodside Petroleum and Qantas. This is a good result but more has to be done and Oil Search will be adopting, as far as we possibly can, the recently published standards, as defined by the Australian Stock Exchange. We have a proud record of independence and the application of the highest Corporate Governance standards in our policies, procedures, management and culture.

    Well, what of the future.

    It has never been brighter for Oil Search. The Company has had a record start to 2003 in production revenue and profits. Oil production will increase from 2002 levels in 2003 and increase again in 2004. The delivery of operatorship will give us more control of investment exploration and other programmes. We are already targeting a number of value initiatives, which will impact performance in 2004.
    These are focused as having a materially positive impact on the core profitability of our oil fields and reducing costs, especially in drilling. This in turn will lead to more sustainable exploration and development and to production growth, especially from established oil fields.

    The year 2003 will focus on a smooth transition to operatorship, development and appraisal activities at Moran and SE Mananda, further exploration and continued focus on commercialising gas, through the PNG Pipeline, other complementary options or stand-alone developments. The Company will also continue with its dividend and share buy-back programme.

    The initiatives outlined in our Strategic Review are working. They are delivering value. The business is performing well. The future has never been brighter for our Company in its 74 year history.

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