Should You Buy Oil Search at This Price?

What happened to the OSH share price?

Oil Search Limited [ASX:OSH] was down by almost 2% in afternoon trading today. This is not a surprise, given the sharp reversal in energy prices over the last two days. The recent positive trend behind oil has been broken, and we are seeing a generally risk-on sentiment in the market.

Given the coming vote on ‘Brexit’, you can expect volatility to continue.

Why did OSH shares do this?

OSH has been at the centre of deal-making with InterOil, and a potential interest from Woodside Petroleum Limited [ASX:WPL]. It is unsurprising to see merger and acquisition activities taking place during the current down-cycle in commodity price. But the question is, is there value in OSH? Arguably yes, if you believe energy prices are at a long term bottom.

Oil producers are inevitably correlated with the price of oil. However, fundamentally strong companies such as OSH have been able to control costs and spearhead on the revenue front. What that does is put a ‘brake’ on the slide in share price relative to the collapse in energy price.

However, that is now behind us. If you believe the commodity cycle is going to turn around in the years ahead, then energy producers are a great place to be. For example, OSH has returned close to 20% in the last three months. The question then is what will happen to oil price in both the long run and the short run?

What now for OSH?

In the long run, there is a good case for a slow reflation in the price of oil. That might simply be due to the adjustment in demand and supply.

Despite the politics played between the big oil-producing countries, everyone realises that the price of oil would adjust by supply-side rationalisation or without it (by letting the market to sort out demand and supply imbalances). The latter choice would take time and occasional fluctuations, similar to what we are experiencing now. It is also unlikely that oil-producing countries will do anything to reflate prices, when prices seem to be taking care of themselves.

In the short run, fluctuations and volatility will reign. That will dictate the movements in a stock such as OSH. There is the US dollar, and a Federal Reserve that has effectively lost its credibility in attempting to normalise rates. This is good for commodities and good for OSH.

Perhaps what investors need to think about is long term versus short term. A long term investment in a stock such as OSH will likely benefit you. In the short run, volatility is expected. Don’t forget the ongoing merger and acquisition activity in the oil sector. That may provide additional incentive for medium term investors to position themselves in OSH.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor

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