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  1. Yak

    13,672 Posts.

    Oil Search

    AGL has signed contracts for 1,480PJ of gas over 15 years from non-PNG producers (BHP-Billiton/
    Esso, Santos -led Cooper Basin producers and Origin Energy).
    As a result of these contracts, AGL advised the partners of the proposed PNG pipeline (which
    includes Oil Search) that it is “reassessing its options for PNG gas” and is unlikely to require
    the 50PJ of PNG gas that it had conditionally signed from 2006.
    We believe that for the PNG pipeline project to proceed it needs to secure contracts for the
    supply of 135PJ of gas. With the withdrawal of AGL’s 50PJ, total commitments so far have
    been reduced to between 35PJ and 50PJ.
    To proceed, the project will now need to secure both the Energex/Comalco and QAL loads at
    the maximum assessed demand and before 20 January 2003. We believe that signing these
    two deals in the timeframe allowed is highly unlikely.
    As a result, we believe AGL’s decision to withdraw from the retail side of the project will
    certainly delay the project beyond 2006.
    Without the gas project, we currently value Oilsearch at $0.72 without the PNG project. Whilst
    the stock is trading at a discount to this valuation, we retain our short term Hold
    Over the longer term, Oilsearch requires exploration activity to replace existing production and
    drive value. Oilsearch needs to achieve significant reductions in operating and drilling costs,
    greater and more continuous drilling programmes and further modification of financial issues to
    drive the business forward. We therefore maintain our long term Underperform
    This deal is positive for AGL as it secures its future gas requirements. This is also positive for
    Santos and Origin Energy which will supply part of the total gas requirements and are likely to
    see a potential competitor in the PNG pipeline disappear.
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