Oil Search (ASX:OSH) slashes dividends after turbulent year

• With last year’s oil price collapse driving a massive slide in financial performance, Oil Search (OSH) has cut its dividends by 89 per cent
• While revenue fell only 32 per cent, the company went from an after-tax profit of US$312.4 million (roughly A$394.47 million) to a net loss of US$320.7 million (around A$404.95 million)
• Core net profit after tax also fell 93 per cent, from US$320.9 million (approximately A$405.20 million) to just US$22 million (around A$27.78 million)
• Since Oil Search’s policy is to return between 35 and 50 per cent of core net profit after tax to shareholders, dividends for 2020 slid from US$0.045 (approximately A$0.057) to US$0.005 (about A$0.0063) per share
• Oil Search is up 7.16 per cent to $4.34 per share

With last year’s oil price collapse driving a massive slide in financial performance, Oil Search (OSH) has cut its dividends by 89 per cent.

For the 12 months ending December 31, 2020, revenue fell a relatively marginal 32 per cent, from US$1.58 billion (around A$2 billion) to US$1.07 billion (roughly A$1.35 billion).

But the drop in sales combined with significantly reduced prices per barrel drove a pivot from a 2019 after-tax profit of US$312.4 million (approximately A$394.47 million) to a net loss of US$320.7 million (roughly A$404.95 million).

Core net profit after tax also fell 93 per cent from US$320.9 million (about A$405.2 million) to just US$22 million (around A$27.78 million).

Since Oil Search’s policy is to return between 35 and 50 per cent of core net profit to shareholders, the company has reduced its dividend distribution from US$0.045 (approximately A$0.057) to US$0.005 (about A$0.0063) per share, which represents roughly 47 per cent of core net profit.

Despite the poor performance, Keiran Wulff, Managing Director of Oil Search, said the difficulties faced in 2020 had pushed the company to become stronger and more resilient.

“As part of executing our capital management plan that is focused on delivering a more resilient balance sheet, we have entered into oil price hedges to reduce the company’s downside exposure to oil prices over the balance of 2021,” he continued.

“We have locked in a floor price of US$55 [around A$69.45] per barrel covering nine million barrels of oil equivalent production over the period from May to December 2021, via the purchase of put options at a pre-tax cost of under US$30 million [roughly A$37.88 million].”

Wulff added that the hedge arrangement would not limit Oil Search’s exposure to future oil price appreciation and that the company would consider the benefits of a longer-term hedging strategy as it nears investment decisions for its major projects.

These projects include the Pikka project in Alaska, which Oil Search said yesterday had begun front-end engineering and design (FEED) work in preparation for initial production set to begin in 2025 at a capacity of 80,000 barrels of oil per day.

In order to help fund costs, the company intends to sell a 15 per cent stake in the project, which it hopes will cover at least 50 per cent of total expenses.

While demand for oil is expected to slowly recover, Oil Search said it expects unit production costs to be higher this year than in 2020. This is due to scheduled maintenance for trains one and two in Papua New Guinea, as well as major maintenance shutdowns that occur every four years.

Oil Search is up 7.16 per cent to $4.34 per share at 10:46 am AEDT.