Oil Search Limited (OSH) explores for crude oil and natural gas, then develops and produces its findings. Although their main operations are in Papua New Guinea (PNG), they also operate in the Middle East and in Australia. Founded in 1929, Oil Search operates all of PNG’s oil and gas fields. It is 17.6% state owned and pays a dividend of millions to the PNG government each year.

In December, Oil Search negotiated $14.0 billion in financing for development of a major liquefied natural gas find in PNG, with venture partners including ExxonMobil and a syndicate of 17 international commercial banks. Although only $13 billion were required to develop the field, the extra funds are not intended to cover cost overruns but to hasten the development, which is scheduled to begin early in 2010. This project is the largest foreign investment ever made in PNG and it is expected to treble the nation’s exports and double its gross national product when fully operational. The stock OSH halted trading on the announcement and gapped up on the open when trading resumed.

Oil Search has a strong financial position with little debt. In 2008 the company increased its cash reserves by 55% to US$191.35 million, while revenue growth was 13% and operating margin 35%. The stock OSH has a P/E ratio of 74.48 and EPS of 0.08.

Being an oil and gas development company, of course the price of OSH is influenced by those of the energy commodities it sells. During the 2008 crude oil run-up, OSH surged appropriately. However, there is a strong resistance level at 7.00, which has been respected several times, most recently in mid-October 2009, and before that in early July 2008. Also, since 2005, an equally strong support level has been set at 3.00, tested and left standing multiple times, as shown on the chart, below:

The summer of 2008 saw OSH establish a head and shoulders formation prior to the financial markets’ epic crash. It tumbled as low as 2.95 before rebounding, and in the final week of 2008 it initiated a new uptrend that took it as high as 6.93 on 16 October 2009. But the resistance at 7.00 held, and OSH retracted back and then broke beneath its bullish trendline, below:

The break beneath trend corresponds with the formation of another head and shoulders, and multiple factors appear to call for OSH to break lower, perhaps as low as its support at 3.00. These factors include the break beneath trend, signalling a potential reversal; the well-defined head and shoulders formation currently underway; and the uncertainty in energy prices, which have levelled off following a steady climb and which could see their own reversal.

technical analysis by Craig Liles

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