Oil Search share price drops on impairment hit of up to US$400 million

The Oil Search Limited (ASX:OSH) share price is down by 2% so far today after announcing an impairment charge prior to the announcement of its 2020 interim results.

Oil Search is engaged in the exploration, development and production of oil and gas in Papua New Guinea (PNG).

Impairment of exploration assets

In a release to the ASX today, Oil Search revealed it expects to recognise a non-cash pre-tax impairment charge of between US$360–US$400 million.

The company assessed the impact of economic conditions to the value of its assets and the impairments to be recognised largely relate to its PNG exploration licences.

The impairment expense is not expected to impact Oil Search’s cash earnings or cashflow. However, the impairment is yet to be audited and signed off on the half year results. Oil Search’s interim FY20 results are scheduled to be released on Tuesday 25 August 2020. 

Structural changes implemented

The Oil Search impairment news follows an organisational review announced earlier this month. As a result of its review, Oil Search implemented a number of structural changes, including a reduction in the headcount of employees and long-term contractors, an increase in female representation, and other cost saving and efficiency measures through the use of technology.

As a result of the cost saving measures, forecast 2020 production costs are expected to be approximately US$10.50/boe compared to prior production cost guidance of US$11–12/boe.

In addition, further cost savings are expected to be announced at the conclusion of implementation of the initiatives. 

Managing director Dr Keiran Wulf said:

We have reviewed how to make our company stronger by prioritising activities and focusing on the capabilities that are required for us to be successful under a range of economic conditions. The work undertaken has been assessed against an independent domestic and international industry organisational benchmarking study to ensure Oil Search’s new cost structures are competitive with global energy industry peers.

In addition, in February this year, the company’s chief financial officer (CFO) stood down from his role, which wasn’t a part of the review. Oil Search has confirmed that a new CFO has been appointed, Ayten Saridas, who will commence in mid-August. 

About the Oil Search share price

The Oil Search share price has fallen 60% in the past 12 months, compared to the S&P/ASX 200 Index (ASX: XJO)’s fall of 11.7%.

Oil Search shares have been heavily impacted by the fall in the oil price, caused by a significant reduction in demand because of the coronavirus pandemic and its associated reduction in travel. 

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Motley Fool contributor Matthew Donald has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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