UPDATE: Oil Search Profit Soars; Flags Cost, Production Cuts

Oil Search Ltd. (OSH.AU) Tuesday reported an expected rise in annual profit but slashed its 2009 exploration budget to adapt to a lower oil price environment and help it fund its share of a massive gas export project in Papua New Guinea.

The PNG-focused oil and gas producer said it is close to signing long-term offtake deals for the Exxon Mobil Corp.-led (XOM) PNG liquefied natural gas project after holding discussions with potential customers in Japan, Korea, China, Taiwan and India.

"The response from the market to the project has been encouraging and despite the economic slow down, it is clear that a number of buyers are willing to sign long-term offtake agreements with the project," Oil Search said in a statement.

Negotiations on Heads of Agreement are at "an advanced stage" and expected to be signed "in the near future", Oil Search said.

Net profit for the year to Dec. 31 rose 128% to US$313.4 million from US$137.2 million in 2007 and included a one-time gain from the company's sale of its Middle Eastern and North African assets in August.

Adjusted net profit, minus those proceeds, jumped 70% to US$240.0 million from US$140.8 million in 2007, in line with the US$240.4 million average forecast of five analysts polled by Dow Jones Newswires.

Analysts see PNG LNG, of which Oil Search owns about 30%, as a crucial plank in the company's growth strategy.

Some were expecting Oil Search to cut its dividend to provide funding for the project's development, but it held its final dividend steady at four U.S. cents a share, and is cutting exploration spending heavily instead.

Oil Search forecast a reduction in exploration expenditure to US$70 million in 2009 from US$176 million in 2008. Development expenditure is forecast to fall to US$130 million from US$162 million.

The cost cutting will take its toll on production, with Oil Search forecasting 2009 output at 8.0 million-8.3 million barrels of oil equivalent, down from 8.6 million BOE in 2007.

Chief Executive Officer Peter Botten said Oil Search has over US$530 million in cash and an undrawn line of cost effective credit, which takes its total liquidity to close to US$1 billion.

"This strength is needed, as we remain on target to commit to the development of the PNG LNG project, a company-maker for Oil Search, within the next 12 months," he said.

A final investment decision is still planned for the end of this year, Botten said.

While discretionary expenditure on exploration will be cut in 2009, Botten said "new acquisitions, especially those which are able to underscore our medium term gas growth objectives, are likely".

Operating revenue in 2008 rose 13% to US$814.3 million, from US$718.8 million in 2007.

Oil Search's final dividend of four U.S cents per share was unchanged from last year, bringing the total 2008 dividend to eight U.S cents, unchanged from 2007.

-By Ross Kelly, Dow Jones Newswires; 61-2-8235-2957; ross.kelly@dowjones.com

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