Results Review, 11 August 2014
RH Petrogas (RHP SP)
Buy (Maintained)
Energy & Petrochemicals - Upstream Oil & Gas Market Cap: USD440m
Target Price: Price:
SGD1.21 SGD0.75 Macro Risks
Making a Comeback To Our Top Alpha List
Growth Value
RH Petrogas (RHP SP) Price Close
Relative to Straits Times Index (RHS)
1.00
0.90
188
0.80
168
0.70
148
0.60
128
0.50
108
0.40 60
88
40
30
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
10
Aug-13
Vol m
20
Source: Bloomberg
Avg Turnover (SGD/USD) Cons. Upside (%) Upside (%) 52-wk Price low/high (SGD) Free float (%) Share outstanding (m) Shareholders (%)
10.5m/8.39m 96.0 61.8 0.48 - 0.97 35 734
Tan Sri Datuk Sir Tiong Hiew King
64.6
Share Performance (%) YTD
1m
3m
6m
12m
Absolute
24.0
(6.8)
14.5
35.1
57.9
Relative
19.4
(7.7)
12.5
25.1
55.3
Steady operational performance. RH Petrogas’ 4,300boepd (barrels of oil equivalent per day) quarterly production was 4.1% higher than FY13’s average of 4,130boepd, with gains from the Basin production sharing contract (PSC) outweighing a natural decline in the Island PSC. EBITDAX (EBITDA excluding exploration expenses) was USD8.2m in 2Q14, up 6% y-o-y, in line with the increase in production. No progress on Fuyu-1; takeover talks still ongoing. The Fuyu-1 approval appears to have been delayed by the ongoing corruption trials in China, and we only see the final stamp coming after the dust settles. However, we understand that the takeover talks are still ongoing and we may see a final decision soon. Oil is worth far more than gas. PSCs likely to be renewed. RH Petrogas trades at an EV/(2P+2C) of USD5.39/boe. Of its 81.6mmboe (million barrels of oil equivalent) in reserves and resources, 71% are in oil. This compares favourably against peers like KrisEnergy (KRIS SP, NR) whose ratio is 17%. Our discussions with management of other exploration and production companies indicate that Pertamina tends to renew PSCs into co-operation contracts (KSOs) (service agreements) right before the PSC expires – this should allay investor concerns on the 2020 expiry of RH Petrogas’ two PSCs. Making a return to our top alpha list. As RH Petrogas’ share price has retraced 21% from its recent high and now offers 61% upside, we add the stock (again) to our top alpha list. Our TP values the company at an EV/(2P+2C) of USD8.74/boe. Potential catalysts include: i) M&As of brownfield assets, ii) the upgrade of 2C resources to 2P reserves, and iii) the approval of Fuyu-1. Key risks include unsuccessful exploration expenses and unexpected maintenance requirements. Maintain BUY, with a revised SGD1.21 TP (from SGD1.23), after adjusting for quarterly net debt.
Forecasts and Valuations
Dec-11
Dec-12
Dec-13
Dec-14F
89
86
86
94
142
2.9
6.1
(65.9)
3.5
10.9
Total turnover (USDm)
Shariah compliant
Reported net profit (USDm) Recurring net profit (USDm)
Dec-15F
2.9
6.1
7.1
3.5
10.9
Lee Yue Jer, CFA +65 6232 3898
Recurring net profit growth (%)
65.0
108.2
16.1
(51.2)
216.0
[email protected]
Recurring EPS (USD)
0.01
0.01
0.01
0.00
0.01
93
51
55
127
40
2.49
2.03
2.48
2.43
2.29
Recurring P/E (x) P/B (x) P/CF (x) EV/EBITDA (x) Return on average equity (%) Net debt to equity (%) Our vs consensus EPS (adjusted) (%)
See important disclosures at the end of this report
2 . 3 0 . 3
0 0 . 3 0 0 RH Petrogas’ 2Q14 results were healthy with c.4,300boepd of . 0 production and EBITDAX of USD8.2m (+43% q-o-q, +6% y-o-y). We 0 believe the Fuyu-1 approval has been delayed by the corruption trials in 0 China, and expect the final stamp after its conclusion. Meanwhile, the stock looks undervalued relative to its peers based on EV/(2P+2C) and considering its 71% oil assets. Add to our top alpha list. Maintain BUY, with a revised SGD1.21 TP (from SGD1.23).
50
Source: Company data, OSK-DMG estimates
8.9
16.2
51.0
35.4
11.4
10.0
11.2
17.0
16.2
11.3
2.7
4.2
(36.8)
1.9
5.9
51.3
7.6
net cash
40.6
45.1
0.0
0.0
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1
RH Petrogas (RHP SP) 11 August 2014
Additional Notes Figure 1: Results in review USD ('000) Revenue
1Q13 20,083
1Q14 19,778
2Q14 19,166
y-o-y -5%
q-o-q -3%
(13,488) 6,595 377 (1,879) (6,617)
(15,689) 4,089 30 (1,258) (387)
(12,945) 6,221 5 (1,119) (1,555)
-4% -6% -99% -40% -76%
-17% 52% -83% -11% nm
Finance costs Share of profit / (loss) from JV Profit before tax Income tax expense Minority interest PATMI
(830) 0 (2,354) (2,514) 0 (4,868)
(816) 0 1,658 (1,585) 0 73
(829) 0 2,723 (1,730) 0 993
0%
2%
nm -31% nm nm
64% 9% nm nm
Adjusted EBITDAX Workings USD ('000) Profit before tax Interest expense Depreciation Depletion of O&G properties Unwinding of discounts Write-offs Impairments Forex translations Inventory obsolescence
1Q13 (2,354) 636 99 2,630 194 6,580 0 0 0
1Q14 1,658 560 108 3,169 256 0 0 0 0
2Q14 2,723 555 111 3,300 274 1,266 0 0 0
y-o-y nm -13% 12% 25% 41% -81% nm nm nm
q-o-q 64% -1% 3% 4% 7% nm nm nm nm
7,785
5,751
8,229
6%
43%
Cost of sales Gross profit Other income Administrative expenses Other operating expenses
EBITDAX
Reasons Lower cost-recovery component of revenue in 2Q14 and lower production in the Island PSC, made up by increased production at the Basin PSC. 2Q14 production was 4,300boepd, up slightly from the 4,230boepd in 1Q14 and the 4,130boepd FY13 average. RH Petrogas has not drilled any new wells these two quarters - the increase came from successful well workovers and maintenance. Higher field maintenance in 1Q14 which management expensed off in the quarter. No forex gain in 2Q14. Decrease in share-option expenses in 2Q14. 2Q14 saw additional write-off of USD1.27m related to the unsuccessful well drilled in the Island PSC in 4Q13. The comparable 2Q13 quarter experienced USD6.58m of unsuccessful drilling expenses.
Tax is a function of profit oil (i.e. most closely linked to gross profits). RH Petrogas maintained breakeven / slight profitability, ahead of most other exploration & production companies in Singapore.
Comments
1Q14 production was a little below potential due to maintenance work for which production in some wells had to be stopped.
Source: Company, OSK-DMG
See important disclosures at the end of this report
2
RH Petrogas (RHP SP) 11 August 2014 Figure 2: Our NPV-and-Risking model
Country
Equity
2P
%
mmboe
Field
2C Prospective Resources mmboe mmboe
Risking
Risked
NPV
NPV
%
mmboe
USDm
USD/boe
Production / Near-production Stage Indonesia
Basin current production
60%
10.3
100%
10.3
105.9
10.3
Indonesia
Island current production
33%
1.6
100%
1.6
17.5
11.0
China
Fuyu-1 Shallow Oil
49%
100%
34.1
320.3
9.4
46.0
443.7
9.7
34.1 11.9
34.1
0.0
Development / Re-activation / Appraisal Drilling Stage Indonesia
Basin - North Klalin
60%
9.5
90%
8.6
79.5
9.3
Indonesia
Basin - SE Walio
60%
2.3
90%
2.1
19.6
9.3
Indonesia
Island - TBC
33%
7.0
60%
4.2
27.6
6.6
Indonesia
Island - Koi
33%
3.8
75%
2.9
23.4
8.2
Indonesia
Island - North Sele
33%
5.7
30%
1.7
5.6
3.3
Indonesia
Basin unallocated
60%
7.3
90%
6.5
60.8
9.3
26.0
216.5
8.3
0.0
35.6
0.0
Exploration Stage China
Fuyu-1 Deep Gas
49%
27.0
30%
8.1
8.1
1.0
Indonesia
West Belida
94%
5.0
10%
0.5
0.5
1.0
Malaysia
SK331
80%
90.0
10%
9.0
9.0
1.0
Indonesia
Basin - Wario & Arar
60%
267.0
10%
26.7
26.7
1.0
Indonesia
Island - Koi & Sele Strait
33%
350.0
10%
35.0
35.0
1.0
Total:
0.0
0.0
739.0
79.3
79.3
1.0
11.9
69.7
739.0
151.2
739.6
4.9
Value (USDm)
Per share
Producing / near-production
443.7
0.60
Development / appraisal
216.5
0.29
Exploration
79.3
0.11
Adjust for Group gross cash USDm)
25.2
0.03
Adjust for Group gross debt (USDm)
-52.1
-0.07
Target equity value (USDm)
712.7
0.97
Shares (m)
734.3
Forex rate (USDSGD)
1.25
Equity value per share (SGD/share)
1.21
USD/boe Implicit EV/(2P+2C) Valuation
8.74
Source: OSK-DMG
See important disclosures at the end of this report
3
RH Petrogas (RHP SP) 11 August 2014
Financial Exhibits Profit & Loss (USDm)
Dec-11
Dec-12
Dec-13
Dec-14F
Dec-15F
Total turnover
89
86
86
94
142
Cost of sales
(57)
(54)
(59)
(64)
(99)
Gross profit
33
32
28
29
43
Gen & admin expenses
(5)
(5)
(6)
(6)
(7)
Other operating costs
(7)
(8)
(10)
(2)
(2)
Operating profit
20
18
12
21
34
Operating EBITDA Depreciation of fixed assets Operating EBIT
33
29
22
32
47
(13)
(10)
(11)
(11)
(13)
20
18
12
1
0
1
Other recurring income Interest expense Exceptional income - net Pre-tax profit
(2) -
(2) -
21 -
(3) (73)
34 -
(4) -
(5) -
19
16
(63)
17
29
(16)
(10)
(3)
(14)
(18)
Profit after tax & minorities
3
6
(66)
3
11
Reported net profit
3
6
(66)
3
11
Recurring net profit
3
6
7
3
11
Taxation
Source: Company data, OSK-DMG estimates
Cash flow (USDm)
Dec-11
Dec-12
Dec-13
Dec-14F
Dec-15F
Operating profit
20
18
12
21
34
Depreciation & amortisation
13
10
11
11
13
Change in working capital
7
(6)
(14)
(2)
Other operating cash flow
3
5
7
43
29
15
0
0
0
(1)
(2)
(3)
(4)
(5)
(11)
(8)
(5)
(14)
(18)
Operating cash flow Interest received Interest paid Tax paid Cash flow from operations Capex
-
15 -
30 -
61 -
31
19
8
12
38
(28)
(28)
(48)
(91)
(52)
-
-
(91)
(52)
Other investing cash flow
(1)
(1)
(2)
Cash flow from investing activities
(29)
(29)
(50)
Shares repurchased
-
-
(2)
-
-
Proceeds from issue of shares
-
-
58
-
-
Increase in debt
31
16
5
(14)
(2)
2
17
14
63
50
10
6
24
29
52
24
Total cash generated
19
4
20
(29)
Forex effects
(1)
0
0
Implied cash at end of period
24
28
49
Other financing cash flow Cash flow from financing activities Cash at beginning of period
50 -
24
10 -
(3) 21
Source: Company data, OSK-DMG estimates
See important disclosures at the end of this report
4
RH Petrogas (RHP SP) 11 August 2014
Financial Exhibits Balance Sheet (USDm)
Dec-11
Dec-12
Dec-13
Dec-14F
Dec-15F
24
29
52
24
21
Inventories
5
6
1
1
1
Accounts receivable
6
9
35
26
39
Total cash and equivalents
Other current assets
1
1
1
1
1
Total current assets
35
44
89
51
61
Tangible fixed assets
65
68
73
154
192
Intangible assets
140
140
111
111
111
Total other assets
55
67
61
61
61
Total non-current assets
259
275
246
326
365
Total assets
294
319
335
377
426
1
5
14
64
74
49
49
64
53
81
6
3
2
2
2
Total current liabilities
56
58
80
119
157
Total long-term debt
79
37
34
34
34
Other liabilities
50
43
44
44
44
Total non-current liabilities
128
80
77
77
77
Total liabilities
184
138
157
196
235
Share capital
138
200
258
258
258
Retained earnings reserve
(28)
(19)
(80)
(77)
(66)
Shareholders' equity
110
181
177
181
192
Total equity
110
181
177
181
192
Total liabilities & equity
294
319
335
377
426
Dec-11
Dec-12
Dec-13
Dec-14F
Dec-15F
76.2
(3.4)
0.0
8.4
51.4
214.2
(8.0)
(35.1)
74.9
61.9
Net profit growth (%)
65.0
108.2
(1179.5)
0.0
216.0
EPS growth (%)
64.8
83.5
(967.0)
0.0
216.0
0.5
22.6
(18.0)
2.0
6.1
Operating margin (%)
22.4
21.3
13.8
22.3
23.8
Net profit margin (%)
3.3
7.1
(76.3)
3.7
7.7
Return on average assets (%)
1.0
2.0
(20.1)
1.0
2.7
Return on average equity (%)
2.7
4.2
(36.8)
1.9
5.9
Net debt to equity (%)
51.3
7.6
(3.0)
40.6
45.1
Recurrent cash flow per share
0.07
0.04
0.01
0.02
0.05
Short-term debt Accounts payable Other current liabilities
Source: Company data, OSK-DMG estimates
Key Ratios (USD) Revenue growth (%) Operating profit growth (%)
Bv per share growth (%)
Source: Company data, OSK-DMG estimates
See important disclosures at the end of this report
5
RH Petrogas (RHP SP) 11 August 2014
SWOT Analysis A higher probability of discoveries in its oilfields that have existing production
Rising oil prices will make future acquisitions more expensive, while increasing the value of its existing assets. Falling oil prices have the opposite impact
Strong pipeline of drilling plans to move resources to reserves Senior management has over 35 years of relevant experience
Has a network within the industry to expand further into Myanmar and other Asean countries
Exploration plans could be delayed by political events in regional countries
P/E (x) vs EPS growth
P/BV (x) vs ROAE
-1800%
60
-2600%
40
-3400%
20
-4200%
0
-5000%
P/E (x) (lhs)
EPS growth (rhs)
Source: Company data, OSK-DMG estimates
2
-7%
2
-15%
1
-23%
1
-32%
0
-40%
P/B (x) (lhs)
Jan-15
-1000%
80
2%
Jan-14
100
3
Jan-13
-200%
10%
Jan-12
600%
120
3
Jan-11
140
Jan-15
1400%
Jan-14
160
Jan-13
2200%
Jan-12
3000%
180
Jan-11
200
Return on average equity (rhs)
Source: Company data, OSK-DMG estimates
Company Profile RH Petrogas is an exploration and production company with oil and gas concessions in Indonesia, Malaysia and China. It has two producing fields in Indonesia and is currently developing the Chinese concession for production. Exploration and appraisal wells are planned for concessions in Malaysia and Indonesia.
See important disclosures at the end of this report
6
RH Petrogas (RHP SP) 11 August 2014
Recommendation Chart Price Close 1.23 1.21
1.23
1.47 1.38
0.80
1.38
1.33
0.90
1.37
Recommendations & Target Price
na
1.00
0.70 0.60 0.50
0.40 Buy 0.30 Aug-09
Neutral
Sell
Nov-10
Trading Buy
Feb-12
Take Profit
Not Rated
May-13
Source: OSK-DMG estimates, Bloomberg Date
Recommendation
2014-05-12
Buy
Target Price Price 1.23
0.65
2014-03-04
Buy
1.21
0.51
2014-02-25
Buy
1.23
0.55
2014-02-21
Buy
1.23
0.56
2014-02-02
Buy
1.37
0.57
2013-11-28
Buy
1.38
0.58
2013-11-22
Buy
1.38
0.58
2013-11-18
Buy
1.38
0.58
2013-11-11
Buy
1.33
0.69
2013-10-31
Buy
1.33
0.67
Source: OSK-DMG estimates, Bloomberg
See important disclosures at the end of this report
7
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