Oil Search Ltd (ASX: OSH) is an oil and gas exploration and development company. Oil Search operates oil and gas fields Papua New Guinea (PNG) and has a 29% interest in the ExxonMobil-operated PNG LNG project. Oil Search also has interests in the United States. Oil Search has a market capitalisation of A$3.5 billion.

 

Why has the global oil price slumped?

The recent drop in oil prices is caused by supply and demand issues. On 5-6 March 2020, OPEC and non-OPEC oil producers met in Vienna to discuss oil production and prices in the wake of weakening global demand due to lower global economic activity in part due to the impact of the coronavirus (COVID-19). The meeting concluded with Saudi Arabia and Russia not agreeing to cut production to increase the price of oil. This has resulted in Saudi Arabia and Russia embarking on a production war to capture increased share of the global oil market regardless of the implications for the price of oil. This is the supply issue for the global oil market, with production significantly increasing while exceeding demand, global oil prices dropped significant to around US$20 per barrel from US$55 – US$60 per barrel. On the demand side, COVID-19 is causing a fall in global oil demand, putting further downward pressure on global oil prices. However, in the light of expectations that OPEC and Russia will reach an agreement to cut oil production, oil prices have slightly bounced back and are around US$25 per barrel.

What did Oil Search announce yesterday (7 April 2020)?

Oil Search announced a business update along with an equity raising to improve their balance sheet. Further, Oil Search announced a 40% reduction in 2020 forecast investment expenditure, from US$710-845 million to US$440-530 million. In addition, capital expenditure for 2021 is expected to be slightly lower if market conditions do not improve. Operating expenditure is expected to be cut through salary cuts, headcount reduction and discretionary expenditure cuts.

In order to boost Oil Search’s liquidity position, the company announced an equity raising (via an accelerated pro-rata non-renounceable entitlement offer and an institutional placement) at an offer price of A$2.10 per share. This equity raising was successfully completed today (8 April 2020), raising a total amount of A$1.08 billion. This will be used to strengthen Oil Search’s balance sheet in the coming months to counter the decline in the oil price.

 

What is the outlook of Oil Search?

The short-term outlook for global oil prices is negative. On the supply side, it is unclear whether Saudi Arabia and Russia can come to an agreement to cut production in order to increase the global price of oil. This is considering both countries have publicly announced that they have the capacity to last out this production war for several years. On the demand side, the continued spread of COVID-19 should lower the demand for oil, as cities are in lock down, major airlines around the world have cut international flights and global economic activity weakens. Looking beyond the short term, the outlook for the global oil price is more positive once the economic environment returns to more normal conditions and issues around COVID-19 fade.

 


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April 8, 2020