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Oil Search (ASX:OSH) share price up 6% despite 93% profit drop

The Oil Search Limited (ASX: OSH) share price is up 6% despite announcing a big drop in its profit.

Oil Search is one of the biggest oil and gas businesses on the ASX.

Oil Search’s FY20 result

The oil and gas giant reported that its FY20 revenue fell by 32% to US$1.07 billion. This was generated from 29 million barrels of oil equivalent (MMboe) of production.

The underlying EBITDA (EBITDAX – which stands for EBITDA as well as impairments and exploration expenses) fell by 37% to $721.1 million.

Oil Search’s core net profit after tax (NPAT) dropped 93% to $22 million and the reported bottom line result was a net loss of $320.7 million.

The core net profit figure excludes an impairment expense of US$374.2 million (or US$260.2 million after tax), site restoration cost increases for previously impaired assets of US$21.6 million and the de-recognition of net deferred tax assets of US$61.5 million.

The oil business explained that it undertook a major strategic review to prioritise activities and capital spending for a low carbon future. It was this initiative that led to a streamlining of the portfolio and incurring the impairment charge. However, management said that the business is now a more focused, leaner and lower cost resilient business in a strong position to capitalise on its resource base and profit from the rising oil price.

You wouldn’t think that free cashflow would rise after a net profit result like the one above. But, after a focus on maximising operating cashflow, Oil Search managed to grow free cashflow by 122% to $12.8 million. It has established a dedicated transformation team to embed a high performance culture across the business.

Oil Search dividend

The board of Oil Search decided to declare a final unfranked dividend of 0.5 US cents per share. This is in line with the board’s policy of paying out between 35% to 50%.

Summary thoughts

Oil Search has done well to generate positive free cash flow despite a huge drop in profit. However, I’m not sure I could ever invest in an oil business because of the expected decline in oil demand over the long term. The oil price crunch in early 2020 would have been the best time to buy oil shares.

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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