2nd UPDATE: Oil Search Profit Soars; Flags Cost, Output Cuts

Oil Search Ltd. (OSH.AU) Tuesday slashed its 2009 exploration budget to adapt to a lower oil price environment and help it fund its share of a "company-making" gas export project in Papua New Guinea.

The Port Moresby-based company booked an expected 70% rise in annual operating profit to US$240 million, largely on the back of higher oil prices last year.

Oil Search has the luxury of already having enough proven and probable gas reserves to feed the proposed US$11 billion, Exxon Mobil Corp.-led (XOM) PNG LNG project for 20 years. It flagged a reduction in exploration expenditure to US$70 million in 2009 from US$176 million in 2008.

It also forecast development expenditure to fall to US$130 million from US$162 million. Oil Search's move to tighten its belt follows similar initiatives from rivals Woodside Petroleum Ltd. (WPL.AU) and Santos Ltd. (STO.AU), which are also working on capital-intensive gas export projects when demand is lower and credit is tight to take advantage of higher anticipated future demand.

Mark Hume, energy analyst at Merrill Lynch, said Oil Search is taking positive steps to protect cash flows in 2009.

PNG LNG appears to be making good progress on signing customers by March or April, Hume said, adding that speculation Oil Search might have to conduct an equity raising to fund the project is overdone. "In the event that oil prices degrade further and stay there for a sustained period, Oil Search still has a number of alternative levers that it can pull before it gets to an equity raising,' Hume said. One lever could involve Oil Search selling part of its 30% stake in PNG LNG, for which it is continuing to receive expressions of interest.

However, Oil Search's chief executive, Peter Botten, said the project was also receiving strong interest from potential financiers.

"We're not silly enough not to look at what's put on the table, and we'll continue to do that," he told reporters.

"But clearly our focus is to deliver the project and maintain as much equity as we can."

Oil Search's bottom line 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.

Some analysts were expecting Oil Search to cut its dividend to provide funding for PNG LNG, but it held its final dividend steady at four U.S. cents, It will, however, underwrite the dividend to raise capital.

Oil Search's cost cutting will hit production, with the company forecasting 2009 output of 8.0 million-8.3 million barrels of oil equivalent, down from 8.6 million BOE in 2007.

Negotiations on PNG LNG sales agreements are at an advanced stage and are expected to be signed by the end of March, Oil Search said.

Botten said a final investment decision on the project is still planned for the end of this year, with first LNG production still targeted for 2013 to 2014.

Despite the funding pressure, Botten said that Oil Search was likely to acquire softened-up exploration and production assets in PNG, via farm-in, to boost its reserves for a possible expansion of PNG LNG, or to feed other LNG plants currently planned for construction in PNG.

Oil Search's operating revenue in 2008 rose 13% to US$814.3 million, from US$718.8 million in 2007.

Its 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. Botten said it was too early to forecast the size of future dividends.

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

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