Oil Search A lot to like about current operations

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1 AUSTRALIA OSH AU Price (at 08:50, 24 Jul 2012 GMT) Outperform A$6.60 Volatility index Low 12-month target A$ month TSR % Valuation A$ - DCF (WACC 11.0%, beta 1.3, ERP 5.0%, RFR 6.1%) 9.95 GICS sector Energy Market cap A$m 8, day avg turnover A$m 20.0 Number shares on issue m 1,331 Investment fundamentals Year end 31 Dec 2011A 2012E 2013E 2014E Revenue m ,254.1 EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x OSH AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, July 2012 (all figures in USD unless noted) 24 July 2012 Macquarie Securities (Australia) Limited A lot to like about current operations Event OSH reported 2Q production and revenue results Impact Operationally solid: Production of 1.80mboe was 7% ahead of our forecast with revenue a more significant 24% ahead due to a large overlift during the period (the seasonal pattern of over/underlifts has seemingly been disturbed by planned facilities downtime in 1Q). Production guidance for the year has been maintained at mboe (we are at 6.6mboe). PNG LNG development clearly going well: Now over half way through the peak construction year, confirmation of initial commissioning gas to be sent down to the plant from 2Q next year suggests downstream progress remains firmly on-track. Meanwhile in the upstream, having signed the contract for Antinov aircraft to start arriving by year-end suggests worst case the Komo airstrip is only ~3 months later than original guidance at FID which is presumably well within contingencies. Finally, management confirmed PNG elections are having no operational impact on the LNG development. Train 3 looking increasingly likely: Confidence continues to grow around the P'nyang discovery and it appears this resource (possibly along with associated gas in Kutubu) could already underpin a 3rd train and as a result commercial negotiations with the PNG LNG JV are due to commence in 2H. What's more, the impending license expiry requires a field development plan to be submitted by end 2014, ensuring that P nyang will remain a focus. An abundance of exploration news flow in 2H: With Trapia and Tarza both drilling ahead, OSH is likely to command significant attention over coming months. On top of this, OSH confirmed receiving numerous bids to farm-in to its offshore acreage with a deal expected before financial results in August (indeed any hold up appears to be driven by several late bids, which are only likely to improve overall deal terms). Also, with the first rig at Hides now inplace, the long-awaited Hides drilling programme is almost here (interestingly OSH also confirmed JV approval to test the riskier Hides Deep prospect). Earnings and target price revision 2012 earnings largely unchanged: A strong revenue result, guidance of a slightly lower effective tax rate and lower opex has been offset by higher exploration and D&A charges. NAV rises by 1.6% to A$9.95/sh. Price catalyst 12-month price target: A$8.60 based on a DCF methodology. Catalyst: OSH could potentially announce the details of its off-shore farm-out process in PNG before its financial results on 21st August. Action and recommendation Maintain Outperform and a A$8.60/sh price target: While on a relative basis OSH is among the more fully valued energy stocks versus underlying NAV, it continues to trade comfortably below core NAV and at a 33% discount to risked NAV, it remains cheap in absolute terms. What s more, given the number of near-term catalysts, OSH is also the stock that is likely to witness the most NAV accretion over the next 12 months. Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website

2 Current reserves Hides upside P'nyang (PRL 3) PRL 11 Huria North Angore Tagari Flinders Pandora New offshore permits Discovered gas in PNG Associated gas upside Potential Reserves Current NAV Trapia Hides Flinders Taza Block Tajerouine Full derisking of discoveries Unrisked NAV Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Core Valuation PNG LNG tr1&2 PNG LNG tr3 (unrisked) Discovered PNG gas (unrisked) Exporation (risked) Upside Case Macquarie Private Wealth Fig 1 The current share price is broadly reflecting the existing oil business and PNG LNG trains 1&2 Fig 2 however the market is likely to start thinking more about expansion trains and exploration as the development risk from trains 1&2 falls away $12 $10 A$ps $12 $10 NAV (A$/sh) $ $8 $6 Current Share Price $6 $4 $2 $4 $0 $2 $0 Jan-09 Aug-09 Mar-10 Sep-10 Apr-11 Oct-11 May-12 Core Risked Share Price Fig 3 NAV roll forward NAV should creep up as we approach first LNG production - possibly to as high as A$15/sh by the end of 2014 Fig 4 Earnings multiples are likely to become more of a focus for as we approach first LNG production OSH NAV roll forward (A$ps) 10 x 9 x 8 x 7 x 6 x 5 x FY01 PER rel to ASX200 PNG LNG construction period x 3 x 2 x 1 x Share Price Base Business +PNG LNG tr 1&2 +PNG LNG tr 3 +PNG LNG tr 4 0 x Fig 5 In the unlikely event that all wells are successful, OSH s current exploration programme could underwrite several expansion trains Fig 6 The current drilling programme could add over A$2/sh to OSH s valuation in the unlikely event that all well results are successful tcf (gross, unrisked) PNG LNG 5 PNG LNG 4 PNG LNG 3 PNG LNG 1&2 $13 $12 $11 $10 OSH NAV (A$/sh) $9 $8 Source: Macquarie Research, July July

3 Macquarie Private Wealth Fig 7 financials (OSH-AU) Share Price: A$6.60 Outperform Shares: m Profit & Loss 2H11A 1H12E 2011A 2012E 2013E 2014E Price Assumptions 2H11A 1H12E 2011A 2012E 2013E 2014E Sales revenue US$m ,254 US$/A$ c add other income US$m Oil-Brent US$/bbl Total revenue US$m ,285 less operating costs US$m (69) (107) (137) (205) (203) (284) Production 2H11A 1H12E 2011A 2012E 2013E 2014E EBITDAX US$m ,000 Natural gas bcf less exploration expensed US$m (22) (57) (61) (130) (108) (135) Crude mmbbl EBITDA US$m Condensate mmbbl less dep. & amort. US$m (24) (29) (50) (56) (54) (110) LNG m tonnes less other non-cash costs US$m (12) (16) (12) (10) (10) (10) Total production mmboe EBIT US$m less net interest US$m (1) 0 (1) (0) (5) (5) 30.0 mmboe Gas Crude Condensate LPG LNG Pre-tax operating profit US$m less tax expense US$m (114) (103) (237) (177) (170) (262) Net operating profit US$m add non-recurring items US$m (33) - (33) Reported profit US$m Adjusted profit US$m EPS (adjusted) Acps EPS Growth % 912% 730% 62% -37% -2% 223% DPS (Ordinary & Special) Uscps DPS (Ordinary & Special) Acps Franking % 0% 0% 0% 0% 0% 0% EFPOWA shares on issue m 1,338 1,327 1,338 1,331 1,339 1, Cashflow Analysis 2H11A 1H12E 2011A 2012E 2013E 2014E Reserves 2011A 2012E 2013E 2014E Cash receipts from operations US$m ,266 Natural gas bcf (0) (0) (0) (1) less operating costs US$m (66) (90) (114) (177) (180) (261) Oil mmbbl less interest paid US$m (3) (4) (3) (5) (5) (54) Total 2P reserves mmboe less tax paid US$m (123) (103) (178) (177) (170) (262) Contingent resources mmbbl Cashflow from operations US$m Total reserves & resources mmboe less expl & devlp US$m (782) (1,007) (1,469) (2,186) (666) (367) less PP&E US$m (4) - (7) P reserve life years less acq./inv. US$m EV / 1P reserves US$/boe add divestments US$m EV / 2P reserves US$/boe less dividends US$m (18) (27) (37) (53) (53) (54) EV / Total Resources US$/boe add equity/other US$m add debt movements US$m , Increase in cash US$m (182) (213) (216) (520) (28) 434 Net debt at year end (cash) US$m 700 1, ,492 2,834 2,539 Balance Sheet 2H11A 1H12E 2011A 2012E 2013E 2014E Per Barrel Statistics 2H11A 1H12E 2011A 2012E 2013E 2014E Cash & cash eq. US$m 1, , Sales Revenue / boe Current assets US$m 1,295 1,082 1, ,181 EBIT / boe Fixed assets US$m 4,407 5,328 4,407 6,386 6,891 7,062 Profit / boe Total assets US$m 5,702 6,411 5,702 7,161 7,638 8,243 Opex/boe Current liabilities US$m DDA/boe Total liabilities US$m 2,685 3,294 2,685 3,971 4,301 4,455 Cash flow/boe Shareholder equity US$m 3,017 3,117 3,017 3,190 3,337 3,789 Ratio analysis 2H11A 1H12E 2011A 2012E 2013E 2014E WACC of 11.0% ND/ND+E % 19% 33% 19% 44% 46% 40% Producing assets US$m A$ps % Interest cover x 4.0 x 3.2 x 4.2 x 3.0 x 3.3 x 7.2 x Kutubu - PDL Dividend payout ratio % 30% 27% 8% 5% 5% 13% Moran - PDL 2/ ROA % 4% 3% 9% 5% 4% 9% Gobe Main/SE Gobe ROE % 4% 3% 8% 5% 5% 13% Hides GTE ROIC % 6% 4% 8% 3% 3% 8% SE Mananda Effective tax rate % 49% 51% 50% 54% 54% 35% Developing assets EBITDA margin % 84% 77% 85% 75% 74% 80% PNG LNG Train 1 & 2 risked 100% 5, EBIT margin % 68% 53% 67% 47% 48% 59% Train 3 (Hides upside) risked 50% Free cash flow US$m , Discovered gas in PNG risked 15% Appraisal 1, Valuation 2H11A 1H12E 2011A 2012E 2013E 2014E Exploration & Appraisal upside EV/EBITDAX ratio x 30.4 x 29.0 x 16.1 x 16.2 x 17.1 x 8.5 x Exploration Portfolio 1, EV/DACF ratio x 50.3 x 44.9 x 24.6 x 26.6 x 11.5 x 5.8 x Financial assets P/E ratio x 68.7 x 90.4 x 38.0 x 61.7 x 64.4 x 19.7 x Cash & Investments 1, P/CEPS ratio x 46.7 x 47.5 x 25.0 x 26.8 x 29.7 x 12.8 x Debt - - FCF yield % -4.4% -7.0% -7.6% -15.4% -0.7% 6.4% Drilling Rigs Dividend yield % 0.3% 0.3% 0.6% 0.6% 0.9% 1.1% Capitalised G & A (187) (0.17) Risked NPV 10, Sensitivities (Adjusted Earnings) NPV 2011A 2012E 2013E 2014E Shareprice prem/(disc) to NPV -34% Oil price (+US$1/bbl) US$m core NPV per share (A$) 7.15 delta risked NPV per share (A$) 9.95 % 1.0% 0.0% 0.0% 0.9% 0.6% - unrisked NPV per share (A$) Source: Company data, Macquarie Research, July July

4 Macquarie Private Wealth Fig 8 NAV breakdown Producing Assets Interest Unrisked Unrisked Risk Risked Risked USD/boe A$ps A$ps % NPV Sensitivity mmboe USD (m) mmboe USD (m) risked unrisked -$10 Base +$10 Kutubu - PDL 2 60% % % Moran - PDL 2 60% % % Moran - PDL 5 41% % % SE Gobe 26% % % Gobe Main/Saunders 10% % % Hides GtE 100% % % SE Mananda 72% % % Sub Total , , % Development Assets PNG LNG trains 1 & 2 29% 504 5, % 504 5, % Sub Total 504 5, , % Appraisal upside Hides upside (train 3) 25% 165 1,395 50% % Associated gas upside 60% % % P'nyang (PRL 3) 39% 193 1,108 75% % Discovered gas in PNG 100% % % Mananda 5 71% % % Sub Total 485 3,380 58% 283 1, % Exploration upside Near field exploration 100% 125 1,225 30% % Trapia 53% % % Huria 53% % % North Angore 53% % % Tagari 53% % % Flinders 45% % % Pandora 24% % % Gulf of Papua 70% 700 3,261 10% % Taza Block 60% % % Tajerouine 100% % % Al Meashar - Block 7 Yemen 34% % % Jebel Milh - Block 7 Yemen 34% % % Sub Total 1,587 8,099 13% 184 1, % Financial & Corporate Cash & Investments 1, % Corporate debt - - 0% PNG LNG project debt (not included in NPV as field equity valuation) (1,748) (1.62) (1.62) -16% Drilling rigs % Corporate overheads (187) (0.17) (0.17) -2% Sub Total % Overall total 2,623 mmboe 10,808 USDm % core NPV per share (A$) risked NPV per share (A$) unrisked NPV per share (A$) 2, Ordinary Shares on Issue (m) 1,313 Exchange Rate 0.82 WACC (post tax) 11.0% Share Price 6.60 Price premium (discount) to NPV -34% Proportion of NAV from LNG 57% Mkt Cap 8,665 Source: Company data, Macquarie Research, July July

5 Macquarie Private Wealth Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 June 2012 AU/NZ Asia RSA USA CA EUR Outperform 55.67% 61.00% 53.43% 42.58% 69.23% 46.60% (for US coverage by MCUSA, 9.05% of stocks followed are investment banking clients) Neutral 30.50% 22.11% 36.99% 52.41% 28.02% 33.69% (for US coverage by MCUSA, 8.14% of stocks followed are investment banking clients) Underperform 13.83% 16.89% 9.59% 5.01% 2.75% 19.71% (for US coverage by MCUSA, 0.45% of stocks covered are investment banking clients) Company Specific Disclosures: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Limited's equity securities. Macquarie Bank Limited makes a market in the securities in respect of Limited. 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