Oil Search breaking to the downside

Oil Search looks like it has broken its upward trend that started on August 12.

- PNG Plant over 90% completed

- World oil price falling

- Uptrend broken – Support: $8.22 and 8.00, Resistance 8.51.and $8.80

The stock had been supported by strong fundamentals over this period as forward guidance released at its earnings presentation showed the US$19 billion PNG LNG project was on track and still on budget. The report also showed that capex is unlikely to surprise on the upside in the interim as a mooted second airport evaporated over the year.

Expectations are for the first shipments from PNG to take off in early 2014. This will see OSH moving into production phase as its biggest project shifts gear. It should also see price to earnings multiples sliding from elevated levels due to the high capex needed during development phase.

OSH has the added advantage of holding the tenements in the Papua Gulf which, on the latest exploration reports, show a growing gas and oil table. The other assets in OSH’s favour are the Kurdistan assets which are also finding early success at the five drill sites. The flow rates from Jeribe and Euphrates formations are looking positive for OSH in the longer term and with upcoming feasibility studies may head into construction phase.

However, short term trends suggest OSH could shift to the downside. World oil prices are under pressure from the deadlock in Washington and the calming of tensions in the Middle-east. This is detrimental to baseline earnings and the longer the deadlock lasts the further WTI should fall.

This has seen OSH breaking out of the August 12 uptrend and is not in a firm downtrend. Resistance of $8.22 (which is the 38.2% retracement of the year-to-date high from the May low) is currently being tested; if this is broken then the 50% retracement would be the next level to watch at $8.

To see this downtrend broken we would need to see fundamental support plus a change in rhetoric out of Washington. If the issues out Washington clear, OSH may look to $8.51 and $8.80 resistance.

One year chart of OSH with year-to-date high to low retracementOne year chart of OSH with year-to-date high to low retracement

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