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Oil Search is about to announce another round of cost cutting

China Photos/Getty Images

Oil Search is working on a plan to cut deeper into its costs as falling oil prices continue to eat into profit margins.

Like other energy producers, the oil and gas company has been reducing spending, renegotiating supplier contracts and increasing production to record levels, trying to catch falling global commodity prices.

However, managing director Peter Botten says he is actively prioritising further cost cuts across the business. Details will be released when the company announces full year results on February 23.

“Given the recent further sharp decline in oil prices, we are using the information gained through the 2015 business optimisation program to actively prioritise further cost reduction opportunities across our business,” he says.

“Our overall strategy, however, remains unchanged, with a strong focus on PNG, where we have a major competitive advantage, and on our high-value growth projects.”

The company has also been looking at asset writedowns. However, the company anticipates that the only material impairment charge will be the Taza PSC in Kurdistan, which has a book value of $US399.3 million.

Oil Search generated total revenue of $US1.585 billion for the 2015 year, similar to 2014. But this was achieved by significantly increasing output, resulting in a 63% increase in sales volumes.

Over the year, the average realised oil price nearly halved, to $US51.36 from $US97.79 a barrel, and the trend is to go lower. The price in the fourth quarter was $US42.90 a barrel, or 14% lower than in the third quarter.

Botten says the company would generate positive cash flow even if oil prices fell to $US$20/barrel. Brent crude is up 5.7% today to $US32.26.

Production in the fourth quarter of 2015 was 7.51 million barrels of oil equivalent (mmboe) which took full year production to 29.25 mmboe, 52% higher than in 2014 and an all-time record.

Oil Search says its 2016 production is anticipated to be in the range of 27.5 to 29.5 mmboe.

Late last year Oil Search rejected a $11.65 billion takeover bid from Woodside Petroleum, saying it grossly undervalued the company.

Woodside’s vision was to create a regional oil and gas champion for both Papua New Guinea and Australia with a global portfolio of world class assets and development opportunities.

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