Oil Search : 2017 Half Year Results

HIGHLIGHTS(CONTINUED)

 Oil Search delivered a 2017 first half net profit of US$129.1 million, more than five times the first half of 2016 and 21% above 2016 full year core net profit.

This strong result reflected:

• 16% increase in sales revenue to US$676.2 million, underpinned by materially higher average realised oil/condensate and LNG/gas prices, which increased by 28% and 26%, respectively.

• 12% reduction in operating costs, resulting in total unit production costs of a very competitive US$8.52 per boe and an increase in operating margin to 74%.

• 13% reduction in depreciation and amortisation expense, driven by lower depreciation and amortisation rates for the PNG LNG Project as a result of a material increase in Project reserves following recertification.

 2017 full year production guidance has been upgraded, while the ranges for forecast full year unit operating costs, depreciation/amortisation and capital expenditure have been reduced.

Based on the record performance recently achieved by the PNG LNG Project, the lower end of our 2017 full year production guidance range has been upgraded, with 2017 full year production expected to be between 29.0 and

30.5 mmboe. 2017 full year unit production cost guidance has been reduced, from US$8.00-10.00/boe to US$8.00-9.50/boe, while unit depreciation and amortisation guidance has also been revised down, from US$12.00-13.00/boe to US$11.50-12.50 per boe. Total capital expenditure for 2017 is now estimated to be between US$350 million and US$400 million, compared with previous guidance of US$380-480 million.

 No impairments required, highlighting the strength of Oil Search's asset base.

Despite a reduction in oil price forecasts, in line with current market expectations, no impairment charges were required to the Company's asset carrying values.

 Marketing by ExxonMobil of up to 1.3 MTPA from the PNG LNG Project progressing well.

Strong interest has been received from a number of top-tier buyers for short to medium term supply of high heating value LNG, currently being offered by the Project. It is expected that terms will be agreed with customers by the end of the year and then formalised in binding LNG Sale and Purchase Agreements (SPAs).

 Dialogue continuing between key stakeholders on the next phase of LNG expansion in PNG and monetising PRL 3 and PRL 15 gas at the PNG LNG plant site.

Discussions on the various integrated development options for the Elk-Antelope fields in PRL 15 and P'nyang in PRL 3 are ongoing, with various coordinated development options and technical/commercial structures under review. Work also continues on further optimising PNG LNG production.

 New Government elected in Papua New Guinea.

Extensive briefings have taken place with the new PNG Government and Parliamentarians, as they finalise a 100 Day Plan, designed to address important financial and development issues in the country. Finalising outstanding PNG LNG Project benefits distribution issues and LNG expansion plans have been highlighted as high priority areas for the new Government, led by the Hon. Peter O'Neill.

 Very encouraging exploration/appraisal results in key North West Highlands, adding to longer-term optionality for gas expansion, with activity set to accelerate.

Recent Muruk drilling has confirmed a material gas discovery close to the Hides field and has reduced the risk of several leads and prospects along the Hides to P'nyang trend, increasing long-term optionality to support gas expansion. Appraisal drilling is scheduled to commence at P'nyang South 2 in the fourth quarter of 2017, while Muruk 2 is being planned for early 2018, subject to final joint venture approvals.

 Flexible balance sheet, strong operating cash flow and US$1.82 billion in liquidity

Oil Search's balance sheet has strengthened substantially over the first half of 2017, with net operating cash flow of US$419 million during the period more than sufficient to fund the Company's growth initiatives, scheduled debt repayments and dividend distributions. Net debt declined from US$3.1 billion at the end of 2016 to US$2.8 billion at the end of June and the Company had cash of US$974 million and US$850 million of undrawn corporate credit facilities.

 2017 interim unfranked dividend of four US cents per share was announced, compared to one US cent per share in the first half of 2016

The payout ratio of 47% is towards the top end of Oil Search's policy to pay out between 35% and 50% of core net profit after tax by way of dividends.

COMMENTING ON THE 2017 FIRST HALF RESULTS, OIL SEARCH MANAGING DIRECTOR, PETER BOTTEN, SAID:

"Oil Search reported a net profit after tax for the first half of US$129.1 million, more than five times the first half of 2016 and 21% higher than 2016 full year core profit. Total revenue rose by 16% to US$676.2 million, with lower product sales volumes more than offset by higher realised oil and gas prices.

During the first half, the Company remained focused on optimising its cost base and driving operational efficiencies. Unit production costs, including upstream, pipeline and downstream costs, were a very competitive US$8.52 per boe, which contributed to a strong operating margin of 74%, up from 65% in the previous corresponding period.

Other operating costs fell 34% to US$55.0 million, primarily due to a net increase in inventory reflecting the timing of shipments and InterOil bid-related costs in 2016. Depreciation and amortisation charges for producing assets were US$11.93 per boe, down 13% from US$13.68 per boe in the first half of 2016, reflecting lower depreciation and amortisation rates attributable to the PNG LNG Project as a result of the material increase in Project reserves announced in early 2017, following a recertification by Netherland Sewell and Associates Inc.

Oil Search's financial position improved substantially over the half year. We repaid US$153.4 million of PNG LNG project finance debt and our cash position increased from US$863 million to US$974 million, while at the same time we continued to invest in value accretive growth opportunities, such as the successful Muruk exploration programme. In June, we refinanced our US$500 million corporate facility, achieving improved terms and increasing the facility size to US$600 million, due to strong global bank support. At the end of June 2017, Oil Search had access to total liquidity of US$1.82 billion, including US$850 million of undrawn corporate credit facilities. Our breakeven oil price, including operating costs, corporate overheads, sustaining capital expenditure, interest payments and principal repayments, was US$29.40/barrel, significantly lower than the realised oil price of US$53.35/barrel, allowing us to remain strongly cash flow positive and profitable during the period.

We have revised down our oil price forecasts, in line with current market expectations. Pleasingly, this has not resulted in any impairment to the carrying value of any asset. Our robust asset base and financial strength enables us to continue to invest in growth projects, including the next phase of LNG development in PNG and further exploration, which can generate strong returns over the long-term, through what is expected to be a prolonged period of low oil prices."

"The Board has approved the payment of an interim unfranked dividend of four US cents per share, compared to the 2016 interim dividend of one US cent per share. This represents a dividend payout ratio of 47%, which is towards the upper end of the range of the Board's dividend policy to return between 35% and 50% of core net profit after tax to shareholders by way of dividend.

Following taxation amendments in the PNG 2017 Budget, which included the removal of an exemption from withholding taxes on earnings sourced from PNG petroleum operations, the 2017 interim dividend will be subject to a 15% withholding tax. We continue to hold positive discussions with the PNG authorities with the objective of restoring the exemption for future dividends."