Oil Search Ltd Follows BP and Shell With up to US$400 Million Writedown

At time of writing, Oil Search Ltd’s [ASX:OSH] share price is trading at $2.93, down 2.33% from Friday’s close price of $3.

Oil Search is an ASX-listed oil and gas explorer with a $6.23 billion market cap.

Shares are down today after the company announced they are planning a non-cash writedown of between US$360–$400 million before tax (AU$517–575 million). They mostly relate to Papua New Guinea (PNG) exploration licences.

Oil search says the reason for the writedown is the ‘potential longer-term impact of prevailing economic conditions, the outlook for oil and gas prices and the current status of other factors that could impact on value realization.

Oil prices collapsed earlier this year as the pandemic closed the world economy and demand collapsed. Prices have since somewhat recovered with the Brent crude oil price at close to US$43, at time of writing.

It’s clear though that Oil Search is going through a rough time

Earlier this year the company went on to raise $1.16 billion from investors to weather the oil price crash. They are also cutting 34% of their workforce by December and the executive team has taken a six-month 20% salary reduction.

In the last 12 months the share price has lost over 58%.

Oil search isn’t alone here. Earlier this year both BP and Royal Dutch Shell said they were writing down their oil and gas assets by up to US$17.5 billion and US$22 billion respectively.

And according to Macquarie, courtesy of The Australian, we could see more writedowns from Australian oil and gas producers. Mainly because producers usually use US$70–$75 a barrel to review their asset values.

Oil’s price outlook isn’t looking great

The pandemic collapsed global trade in April. The IMF expects global trade will fall by 12% this year.

But there’s too much uncertainty around. Virus cases are increasing in Brazil, US, India, and here in Australia. Much of Victoria is in lockdown.

And even if they are not in lockdown, people are going out less and working from home to avoid catching the virus.

New York, for example, has started to reopen but reports public transport use is down by 53% since before coronavirus, and outdoor diners have dropped by 95% since this time last year.

It’s unlikely that we will see demand recover to previous levels.

At the same time, OPEC+ agreed to cut oil supply after oil collapsed by 10% of global output. But that agreement ends in August and it looks like they could start to ease on production cuts.

It’s why we think there are better investments out there.

Check out editor Greg Canavan’s new report ‘Five Bounce Back Stocks to Watch during the Market Crash‘ (5 Stocks to Survive the Coronavirus Crash). In this free report, Greg gives you five stocks he believes will survive the pandemic.

You can access this report here.


Selva Freigedo


Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

The Rum Rebellion