OSH Across client portfolios that have elected the ‘Blend’ Australian equity option we have bought Oil Search (OSH), with the purchase funded by the sale of Insurance Australia Group (IAG).

Purchase of Oil Search

OSH is the 25th largest company in the S&P ASX 100 Index by market capitalisation and Papua New Guinea’s (PNG) largest exploration & production company where it holds an extensive spread of oil and gas production and exploration licences.  Its key asset is a 29% interest in the ExxonMobil operated PNG LNG Project that was brought online ahead of schedule in May 2014. In addition to the PNG LNG Project, OSH has interests in, and operates all of, PNG’s currently producing oil fields. The company also has exploration interests in the Middle East and North Africa, focused on oil opportunities that offer the potential for significant growth and value upside.

We like Oil Search for the following reasons:

  • The transformational PNG LNG project underpins strong free cash flow
  • Low cost production underpins solid operating margins
  • The potential for lower capex expansion given existing infrastructure
  • The proximity of the resources to major Asian markets
  • Leverage to a falling A$
  • The potentially very large Taza resource

While uncertainty around the oil price is a short term risk, longer term we believe the company will have sufficient gas reserves to underpin additional LNG trains which can be organically funded given the company’s strong financial position.

To read more please refer to the Company Snapshot.

Sale of IAG

Despite a market-leading personal lines franchise and a relatively stable earnings outlook near-term, general insurance markets in Australia and NZ are mature limiting strong organic growth opportunities.  Looking ahead we expect premium rates will come under increasing pressure, inhibiting future premium growth and/or resulting in market share loss for incumbents like IAG, especially in commoditised product lines like motor insurance.  In addition, with low bond yields and tight credit spreads there could be pressure on investment income with 100% of technical reserves allocated to fixed income (a negative for insurance trading margin).  Finally, while the company has recently benefitted from reserve releases as a result of a benign catastrophe season, earnings remain susceptible to large unforeseen catastrophe / natural hazard claims stemming from uncontrollable natural disasters.

DISCLAIMER

EP Financial Services Ltd

The information in this report is relevant to the management of portfolio’s with your risk profile generally and may differ slightly to the actions taken in relation to your specific portfolio; should you require further detail on the impact to your individual portfolio please contact your EP Financial Services Investment adviser.

This is not a recommendation or invitation to, buy or sell any securities. This report has been prepared for the addressee only in relation to their portfolio managed by EP Financial Services Pty Ltd and any other party reading this report should consider it general advice only and it may not be suitable in your particular circumstances. It is recommended that any persons who wish to act upon this report consult with their EP Financial Services Investment adviser before doing so. Those acting upon such information without advice must consider the appropriateness in light of their particular circumstances and do so entirely at their own risk.

EP Financial Services Pty Ltd ABN 52 130 772 495, its related bodies corporate, directors and officers, employees, representatives and agents (“EP Financial Services”) do not accept any liability for the results of any actions taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. This report was prepared as private communication to clients and is not intended for public circulation, publication or for use by any third party. Whilst this report is based on information from sources which EP Financial Services believes are reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect EP Financial Services judgement at this date and are subject to change. The contents of this report may not be reproduced in whole or in part without the prior written consent of EP Financial Services.

Disclosure of Interest

EP Financial Services may from time to time hold an interest in any security referred to in this report and may, as principal or agent, sell such interest. EP Financial Services advise that it may earn brokerage, commissions, fees or other benefits and advantages, direct or indirect, in connection with the making of a recommendation or dealing by a client in these securities. Some or all of our Representatives may be remunerated wholly or partly by way of commission. If you require further details of these interests please contact EP Financial Services directly.