AUSTRALIA OSH AU Price (at 05:10, 16 Feb 2017 GMT) Outperform A$7.11 Valuation A$ - DCF (WACC 8.5%, beta 1.4, ERP 5.0%, RFR 3.3%) 6.70 12-month target A$ 7.60 12-month TSR % +8.2 Volatility Index Medium GICS sector Energy Market cap A$m 10,826 30-day avg turnover A$m 27.7 Number shares on issue m 1,523 Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E Revenue m 1,539.3 1,197.5 1,496.6 1,464.1 EBIT m 692.6 379.4 567.2 515.8 Reported profit m -39.4 165.1 261.6 213.5 Adjusted profit m 359.9 95.1 261.6 213.5 Gross cashflow m 829.2 589.3 875.4 855.9 CFPS 54.5 38.7 57.5 56.2 CFPS growth % -4.9-28.9 48.5-2.2 PGCFPS x 10.0 14.1 9.5 9.7 PGCFPS rel x 0.96 1.25 1.01 0.99 EPS adj 23.6 6.2 17.2 14.0 EPS adj growth % -26.8-73.6 175.0-18.4 PER adj x 23.1 87.4 31.8 39.0 PER rel x 1.34 4.54 1.98 2.44 Total DPS 10.0 2.8 6.9 5.6 Total div yield % 1.8 0.5 1.3 1.0 Franking % 0 0 0 0 ROA % 6.6 3.7 5.5 5.1 ROE % 7.4 2.0 5.4 4.2 EV/EBITDA x 10.1 13.5 10.0 10.2 Net debt/equity % 72.0 67.6 56.6 45.7 P/BV x 1.8 1.7 1.7 1.6 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, February 2017 (all figures in USD unless noted, TP in AUD) 16 February 2017 Macquarie Securities (Australia) Limited Proving up PNG Event OSH announced its 2016 reserve report. The report follows the certification of PNG LNG reserves and resources by Exxon Mobil s (XOM US, US$83.16, Underperform, TP: US$72.00) auditor Netherland, Sewell & Associates Inc (NSAI). The company s 1P and 2P reserves have been increased 42% and 7%, respectively, while total 2C resource remains flat. Impact Growing PNG LNG gas: As expected, OSH increased its net 1P and 2P gas reserves to 2.1TCF and 2.4TCF within the PNG LNG Project, an increase of 50% and 12%, respectively. This reflects a gross increase of ~2.5tcf (1P) within the project and opens the door for parties to commence contracting of additional volumes. We anticipate that ~1mtpa will be signed under mediumterm contracts from 2Q17, as the project continues to produce at ~8mtpa, which is well above original capacity and existing contracted volumes of 6.6mtpa. If a further gross volume of 1mtpa is contracted, we expect OSH to generate an additional ~US$80m over the next three years. Gas future looks promising: With net 2C resources of 1.5tcf and 1.4tcf within the Elk/Antelope and P nyang fields, and additional gross estimate of 1-3tcf within the Muruk-1 discovery, the PNG parties have significant volumes for at least an additional two-train development. We continue to forecast FID of Train 3 and 4 for 2Q19 with production commencing from 2H22. We expect Elk/Antelope to be developed initially, with P nyang development delayed until the early 2030s. Liquids continue to decline: Despite overall volumes rising, the result highlighted a reduction in PNG LNG liquid-gas ratio, which falls from ~23 to 20boe/mscf on a 2P basis. Outside of PNG gas, the company made no additions to oil reserves. Ex-PNG LNG oil/condensate 2P reserves fell ~15% to ~28mmboe. While OSH has done a good job in reducing field declines, reserves at Kabutu and Moran (~99% reserves) both fell ~15%. At 2016 production rates, the fields have ~5 and 7 years of remaining reserve life, respectively. Earnings and target price revision No change Price catalyst 12-month price target: A$7.60 based on a DCF methodology. Catalyst: 2016 results (21 Feb), Muruk-1 drilling results, contracting of medium-term volumes from PNG LNG Action and recommendation Maintain Outperform: OSH continues to be the preferred pick of our largecap coverage due to our expectations of positive catalysts coming out of PNG. These include EOM s acquisition of InterOil (IOC US, Not Rated) nearing completion (a court meeting is scheduled for Monday Feb 20), execution of medium-term contracts from PNG LNG and what is looking like addition of a large resource from Muruk-1 (1-3tcf). Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Reserve upgrade The company announced 1P and 2P reserves have been increased 42% and 7%, respectively, while total 2C resource remained flat. The upgrade follows certification of PNG LNG s reserves by EOM s auditor NSAI. PNG LNG net 1P and 2P gas reserves increased 50% and 12%, respectively, to 2.1TCF and 2.4TCF. Additional volumes should allow the parties to commence negotiations for medium-term contracts from the project. We expect contracting of gross volumes of ~1mtpa commencing from 2Q16. At our current spot price forecast, we expect contracting the gas to deliver additional US$80m net to OSH over the next three years. The company currently has ~16 years or 1P reserve life, 18 years of 2P reserve life and 44 years of 2P + 2C reserve life, under 2016 production rates. Fig 1 PNG LNG 1P gas reserves increased ~50% YoY, while 2P reserves increased ~12% Fig 2 Production levels from PNG LNG have been well above 6.6mtpa contracted volumes and above nameplate capacity of 7.3mtpa 3,000 bcf 8.5 mtpa 2,500 8.0 2,000 1,500 1,000 2,137 2,155 2,406 7.5 7.0 Nameplate capacity (7.3mpta) 500 1,424 6.5-1P Reserves Previous (2015) Updated (2016) 2P Reserves 6.0 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Existing Contracted Volumes Above Contract Existing Nameplace Capacity Source: Company Data, Macquarie Research, February 2017 Source: Company Data, Macquarie Research, February 2017 Fig 3 Reducing spot exposure by contracting 1mtpa of LNG volumes from PNG LNG will see an increase in revenue over the next three years, down to a 10% slope Fig 4 We expect PNG LNG to commence mediumterm contracts in 2Q16 now that the JV has completed its reserve re-certification US$m 4,300 4,250 4,200 4,150 4,100 4,050 4,000 3,950 3,900 2017 2018 2019 mtpa 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 - Spot Prices 10% Slope 11% Slope 12% Slope 12.5% Slope Foundation contracts Medium-term contracts Spot Volumes Source: Company Data, Macquarie Research, February 2017 Source: Company Data, Macquarie Research, February 2017 16 February 2017 2
Fig 5 financials Source: Company data, Macquarie Research, February 2017 16 February 2017 3
Fig 6 NAV Breakdown Source: Company data, Macquarie Research, February 2017 16 February 2017 4
Macquarie Quant View The quant model currently holds a neutral view on. The strongest style exposure is Earnings Momentum, indicating this stock has received earnings upgrades and is well liked by sell side analysts. The weakest style exposure is Profitability, indicating this stock is not efficiently converting investments to earnings; proxied by ratios like ROE or ROA. 186/550 Global rank in Energy % of BUY recommendations 50% (8/16) Number of Price Target downgrades 4 Number of Price Target upgrades 16 Fundamentals Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Energy) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. 0.8 0.7 0.6 0.2-0.5-1.5-3.0-2.0-1.0 0.0 1.0 2.0 3.0-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. -0.4-0.1 0.2-0.1 0.5 NaN -3.0-2.0-1.0 0.0 1.0 2.0 3.0-100% -50% 0% 50% 100% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Capex to Sales FY0 Price Upside Incremental Capex Capex Growth Momentum 3 Month Relative Turnover Turnover (USD) 20 Day FCF Yield FY0-27% -32% Negatives Positives -20% -20% -40% -20% 0% 20% 40% 23% 21% 20% 26% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score 0.19-0.16-0.04-0.27-0.02-0.19-0.08 0.08-0.52-0.32 0.10 Percentile relative to sector(/550) Percentile relative to market(/422) 0 50 100 0 50 100 0 0 1 1 Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 16 February 2017 5
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 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 60 100% 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 Asia/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 31 December 2016 AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients) Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients) Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients) OSH AU vs ASX 100, & rec history XOM US vs S&P 500, & rec history (all figures in AUD currency unless noted) (all figures in USD currency unless noted) 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, February 2017 12-month target price methodology OSH AU: A$7.60 based on a DCF methodology XOM US: US$72.00 based on a DCF methodology Company-specific disclosures: OSH AU: MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates has provided Ltd with investment advisory services in the past 12 months, for which it received compensation. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Limited's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures. Date Stock Code (BBG code) Recommendation Target Price 03-Feb-2017 OSH AU Outperform A$7.60 24-Jan-2017 OSH AU Outperform A$8.40 08-Dec-2016 OSH AU Outperform A$8.50 14-Oct-2016 OSH AU Outperform A$8.40 16-Aug-2016 OSH AU Outperform A$8.10 08-Jan-2016 OSH AU Outperform A$8.00 27-Nov-2015 OSH AU Outperform A$9.00 09-Sep-2015 OSH AU Outperform A$8.50 15-Apr-2015 OSH AU Outperform A$9.00 25-Feb-2015 OSH AU Outperform A$9.50 09-Dec-2014 OSH AU Outperform A$9.20 08-Oct-2014 OSH AU Outperform A$10.25 20-Aug-2014 OSH AU Outperform A$10.75 20-Jun-2014 OSH AU Outperform A$10.50 04-Jun-2014 OSH AU Outperform A$10.00 29-Apr-2014 OSH AU Outperform A$9.80 Target price risk disclosures: OSH AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. 16 February 2017 6
This publication was disseminated on 16 February 2017 at 11:20 UTC. Macquarie Wealth Management XOM US: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN 58 002 832 126, AFSL 238947, a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN 41 002 574 923 AFSL 237504 ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Apart from Macquarie Bank Limited ABN 46 008 583 542 (MBL), any MGL subsidiary noted in this research,, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures Macquarie Group 16 February 2017 7