Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY) has been paying a dividend since May 2003, but it would be stretching things to describe it as an “income play.” Make no mistake: This is an aggressive growth story with a modest income component.

The stock has posted an 11.33 percent total return in US dollar terms since we added it to the AE Portfolio Aggressive Holdings in the January issue. This compares to an 11.12 percent total return for the S&P 500 Index and an 8.11 percent total return for the S&P/Australian Securities Exchange 200 Index from Jan. 13, 2012, through Aug. 16, 2012.

Appreciation of the Australian dollar versus the US dollar has boosted the total return figure for American investors, as the aussie has risen from a closing exchange rate of USD1.0322 on Jan. 13 to USD1.0513 Aug. 16. That’s about 1.85 percent.

The stock is up 8.95 percent in Australian dollar terms, while the S&P/ASX 200 is up 5.80 percent. The S&P/ASX 200 Energy Index, meanwhile, is down 3.19 percent.

The stock traded as low as AUD3.40 on a closing basis on the ASX on Oct. 10, 2008. From there the stock immediately bounced; it peaked at AUD7.60 on Apr. 11, 2011, but slumped to AUD5.40 on Sept. 23, 2011, just before the Sept. 26 launch of AE. This decline coincided with a slide in Brent crude prices from above USD126 in early April 2011 to USD99 by early October 2011.

After the great global fear brought on by the silly downgrade of US credit by Standard & Poor’s Oil Search bounced again, and although the stock has trended down with the price of crude this year it has held a higher level because of the long-term promise of its PNG LNG project.

Since October 2008 the stock has been on a strong uptrend, broken for a short time by the fall 2011 slide, characterized by a bullish technical indicator, “higher lows.” In other words, buyers are coming in sooner on dips as time passes.

In light of its recent operating results, including successes in its drilling and exploration programs that suggest PNG LNG could be even more prolific than forecast, we anticipate it will soon make “higher highs” as well.

In late April 2012 the stock traded as high as AUD7.52 on a closing basis, due in part to a significant gas discovery at a sidetrack to its key P’nyang South 1 site in Western Province of Papua New Guinea. The well, P’nyang South ST1, extended the size of the known gas column at P’nyang South.

Based on the preliminary interpretation of data collected in both P’nyang South 1 and P’nyang

South 1 ST1, the gas zone is interpreted to extend approximately 200 meters deeper than the lowest known gas in P’nyang South 1, indicating an increase in the total gas column to approximately 380 meters.

During the second quarter Oil Search completed drilling the P’nyang South 1 ST1 well. A substantial gas accumulation was discovered in the primary reservoir objective, which is expected to result in a material increase in estimated gas resources at P’nyang.

Seismic interpretation and structural mapping suggests additional “up-dip” potential above P’nyang South 1 and indicates a potential vertical gas column in the P’nyang South field of over 650 meters. (“Up-dip” is a term used in a hydrocarbon reservoir that isn’t flat, for example a dipping formation. In such a formation, gas is found up-dip from the oil.)

Participants in P’nyang South 1 ST1 include Oil Search (which owns 38.5 percent), ExxonMobil affiliates (49 percent) and JX Nippon (12.5 percent). Oil Search is drilling the P’nyang South well under contract with the operator, Esso PNG P’nyang Ltd.

The recent P’nyang discoveries are subject to further evaluation, but it looks like these could be the sources for expansion of PNG LNG to include third and fourth trains in addition to the two that comprise the original plan. Studies of the appraisal wells seem likely to extend the 1 trillion cubic feet (tcf) existing P’nyang discovery up to the 2 tcf to 3 tcf.

P’nyang is the first in a series of potentially high-impact areas to be drilled in PNG and overseas over the next 18 months.

At the same time, expansion of Oil Search’s Hides gas resource could be the most cost-effective feedstock for a third train for Oil Search’s key Papua New Guinea LNG project.

Esso Highlands Ltd, a subsidiary of Exxon Mobil Corp (NYSE: XOM), announced Jul. 30, 2012, that drilling operations for PNG LNG had begun at the Hides field, located in the Southern Highlands Province of Papua New Guinea. The drill wells will produce approximately 9 tcf over the life of the project.

PNG LNG is a high-quality project contracted to good counterparties. It’s operated by the very competent Exxon and with ample project finance a reasonable level of cost overruns can be covered, were they to happen. And the project remains on time and within a revised budget announced in December 2011.

Oil Search owns 29 percent of the project. Operator Exxon Mobil has the largest stake at 33.2 percent, the government of Papua New Guinea maintains a 19.6 percent stake, Santos Ltd (ASX: STO, OTC: STOSF, ADR: SSLTY) owns 13.5 percent and JX Nippon Oil & Energy Corp holds 4.7 percent.

LNG from the project is fully contracted to four key buyers, including TEPCO (1.8 million metric tons per annum) and Osaka Gas (1.5 Mmtpa) from Japan, CPC from Taiwan (1.2 Mmtpa) and China’s Sinopec (2.0 Mmtpa).

Based on recent gas discoveries via Oil Search’s drilling program in the area it’s also “probable,” according to Santos CEO David Knox, that a third train will be added the project, increasing its 6.3 Mmtpa capacity.

To date 505 million barrels of oil equivalent of proven and probable reserves have been booked to Oil Search’s reserves base. When the project peaks Oil Search’s share of annual production will be approximately 18 million barrels of oil equivalent.

PNG LNG remains on track to deliver strong and stable long-term cash flow for Oil Search beginning in 2014. The LNG plant site can accommodate future LNG trains, and Oil Search will maintain its role as the operator of the oil fields producing associated gas and the liquids export system.

Other growth avenues and potential catalysts for share-price upside include an appraisal well near the Mananda-5 discovery, which is planned for early 2013.

Trapia-1 spudded in June and should reach “TD,” or “total depth,” by late in the third quarter of 2012. (“TD” is the planned end of the well, measured by the length of pipe required to reach the bottom.) The well is targeting a gas structure on trend with the Hides and Angore PNG LNG gas fields.

And the Kurdistan Taza-1 well in Iraq, in which Oil Search has a 60 percent interest, recently spudded, with results expected within a couple months. Oil Search pegs the chance of success of a 300 million barrel to 500 million barrel find is around 1-in-2 due to nearby/on trend discoveries. Taza is prospective for oil and gas.

Oil Search is also negotiating farm-out arrangements for assets in the Gulf of Papua, with talks expected to conclude soon. In late 2012 Oil Search plans to drill two firm plus two optional wells in the Gulf.

Oil Search posted total crude and gas production of 3.56 million barrels of oil equivalent for the six months ending Jun. 30, 2012, an 8.4 percent decline from the prior corresponding period. But output in the second quarter was actually up, by 24 percent sequentially to 1.8 million barrels of oil equivalent, and this was its best production performance since the fourth quarter of 2010.

Total oil and gas production for the first quarter was 1.46 million barrels of oil equivalent, down from 1.64 million barrels of oil equivalent for the three months ended Dec. 31, 2011. Management noted during its presentation of final 2011 results, on Feb. 21, 2012, that output during the first three months of 2012 would be impacted by a 16-day planned facilities shutdown for work related to PNG LNG.

This is the last of the major shutdowns, with two shorter shutdowns at a processing facility planned for the second and fourth quarters of 2012. Management maintained its full-year production guidance at 6.2 million to 6.7 million barrels of oil equivalent.

Total operating revenue for the quarter was USD211.3 million, up 13 percent from the first quarter’s USD187.2 million, reflecting higher production offset by lower oil prices. Second-quarter revenue declined 2.98 percent year over year due to declining oil prices.

Total operating revenue in the first half of 2012 was USD398.5 million, up 7 percent from the prior corresponding period. Total oil sales for the quarter were 1.61 million barrels, compared to oil production of 1.54 million barrels. Crude inventory awaiting sale at the end of June 2012 was 0.06 million barrels.

Oil Search realized an average oil price in the second quarter of USD108.73 per barrel, 12 percent lower than the first quarter’s USD124.14 per barrel due to a decline in global oil prices. The average realized price for the first half was USD115.48 per barrel, compared to USD116.89 per barrel in the prior corresponding period.

Good progress was made on PNG LNG construction activities during the second quarter, including the completion of the offshore pipeline lay and the raising of both LNG storage tank roofs at the LNG plant site near Port Moresby.

Management also noted that it’s close to deciding on partner or partners for its natural gas exploration assets in Papua New Guinea. Managing Director Peter Botten, in search of joint venture partners experienced with LNG operations, has identified Exxon Mobil and Royal Dutch Shell Plc (London: RDSA, NYSE: RDS/A) as backers.

“In the Gulf of Papua, bids were received and negotiations are continuing with potential farm-in (joint venture) partners, with completion of a farm-out expected to conclude shortly,” the company said in a statement.

As of Jun. 30, 2012, Oil Search had USD852.2 million in cash, excluding joint venture balances, while its revolving oil facility, with a commitment limit of USD217.5 million, remained undrawn, providing total liquidity of USD1.07 billion. USD2.35 billion had been drawn down from the PNG LNG project finance facility at the end of the quarter.

According to its second-quarter earnings announcement Oil Search has started negotiating with “a range of banks” about refinancing of its undrawn corporate facility, which expires in late 2013. The company has received commitments “from a number of these banks” and expects to complete negotiations in the second half of 2012

Oil Search spent USD73.8 million on exploration and evaluation activities, USD421.2 million on PNG LNG and USD17.9 million on oil field development work.

Oil Search, which currently yields 0.5 percent, is a strong buy for long-term growth and modest but stable income up to USD8 using the symbol OSH on the Australian Securities Exchange (ASX) or the symbol OISHF on the US over-the-counter (OTC) market.

Oil Search also trades as an American Depositary Receipt (ADR) on the US OTC market under the symbol OISHY. The ADR represents 10 shares of the ASX-listed stock. Owning the ADR conveys all the same benefits as owning the ASX listing or the US OTC-listed OISHF share, including the effects of a rising Australian dollar. Oil Search’s US OTC-listed ADR is a buy under USD80.

Oil Search’s fiscal year corresponds with the calendar year, beginning Jan. 1 and ending Dec. 31. The company reports full financial and operating results twice a year; it typically posts first-half results in late August, with full-year numbers out in late February.

The company declared a final dividend of AUD0.02 per share in respect of its 2011 results on Feb. 21, 2012, when it reported those numbers. This final dividend was paid Apr. 10, 2012, to shareholders of record on Mar. 15. The shares traded ex-dividend on this declaration as of Mar. 8, 2012.

Based on past practice management will declare an interim dividend when it reports full 2012 first-half results on Aug. 21, 2012. An interim dividend of AUD0.02 per share declared Aug. 23, 2011, was paid Oct. 10, 2011, to shareholders of record on Sept. 15, 2011. Shares traded ex-dividend on this declaration as of Sept. 9, 2011.

Dividends paid by Oil Search are “qualified” for US tax purposes. The Australian government withholds 15 percent, based on the US-Australia tax treaty on double taxation. The two countries have not taken the step of eliminating withholding from dividends paid in respect of shares held in a US IRA, as have the US and Canada.

Among the 17 analysts who cover the stock, 15 rate it a “buy” according to Bloomberg’s standardization of brokerage house recommendation terminology. There is one “hold” and one “sell” rating on the stock at present.

The “best consensus” 12-month target price among the 12 analysts that provide such a number is AUD8.35, with a high of AUD8.95 and a low of AUD8.00. This implies low-end expectations for a price-only return of 11.89 percent based on the stock’s AUD7.15 closing price on Aug. 16. The high-end expectation is for a capital gain of 25.17 percent.