Company Update, 21 May 2014

RH Petrogas (RHP SP)

Buy (Maintained)

Energy & Petrochemicals - Upstream Oil & Gas Market Cap: USD501m

Target Price: Price:

SGD1.23 SGD0.86 Macro Risks

Potential Takeover Offer On The Cards

Growth Value

RH Petrogas (RHP SP) Price Close

Relative to Straits Times Index (RHS)

169

0.70

149

0.60

129

0.50

109

0.40 40 35 30 25 20 15 10 5

89





Source: Bloomberg

Avg Turnover (SGD/USD) Cons. Upside (%) Upside (%) 52-wk Price low/high (SGD) Free float (%) Share outstanding (m) Shareholders (%) Tan Sri Datuk Sir Tiong Hiew King

3.61m/2.87m 70.9 43.4 0.47 - 0.92 35 734 64.6

Share Performance (%) YTD

1m

3m

6m

12m

Absolute

41.3

29.5

44.9

59.8

72.7

Relative

38.2

29.1

39.1

57.2

78.2



Potential takeover offer. In response to an SGX query, RH Petrogas said that its controlling shareholder has been approached by an investor. It also said that both parties have engaged in discussions regarding a potential proposal that may lead to a takeover offer of shares in the company. Note, however, that no formal offer has been made as yet. Potential offer price above SGD1.00/share. Based on our model, the liquidation value of RH Petrogas’ oilfield assets is SGD0.95/share, which implies EV/(2P+2C) of USD6.70/barrel of oil equivalent (see Figure 2). The company could be worth significantly more on a control basis to a takeover buyer. Clear rationale for purchase. According to our model (see Figure 1), the Fuyu-1 field accounts for 46% of RH Petrogas’ equity value. The approval of the Fuyu-1 overall development programme (ODP), which is expected in 1H14, should clear the final hurdle for full development of this large oilfield. It should also significantly raise the company’s market value and cash flow expectations. Another key attraction should be RH Petrogas’ rapidly-increasing production levels, which were at 4,100 barrels of oil equivalent per day (boepd) in FY13 and are now probably at c.4,400boepd. We also expect the company to make some valueaccretive brownfield acquisitions this year, which have not yet been imputed into our model. Maintain BUY and SGD1.23 TP. While the discount on RH Petrogas has narrowed significantly since our last update, we believe that there is significant upside from here should an offer come through. The downside may see eventual support from the approval of the Fuyu-1 ODP and of the plans of development for the upcoming Indonesian fields. Maintain BUY and SGD1.23 TP, which is based on our NPV-and-risking model.

Forecasts and Valuations

Dec-11

Dec-12

Dec-13

Dec-14F

89

86

86

104

152

2.9

6.1

(65.9)

7.5

15.9

Total turnover (USDm) Reported net profit (USDm)

Shariah compliant

Recurring net profit (USDm)

Dec-15F

2.9

6.1

7.1

7.5

15.9

Recurring net profit growth (%)

65.0

108.2

16.1

5.1

113.6

Lee Yue Jer, CFA +65 6232 3898

Recurring EPS (USD)

0.01

0.01

0.01

0.01

0.02

[email protected]

Recurring P/E (x)

106

58

62

67

31

P/B (x)

2.84

2.32

2.82

2.71

2.50

P/CF (x)

10.2

18.4

58.1

28.0

11.7

EV/EBITDA (x)

11.2

12.7

19.4

15.2

10.7

2.7

4.2

(36.8)

4.1

8.3

51.3

7.6

net cash

36.8

38.2

0.0

0.0

Return on average equity (%) Net debt to equity (%) Our vs consensus EPS (adjusted) (%) Source: Company data, OSK-DMG estimates

See important disclosures at the end of this report

  2  . 3 0 . 3

0 0 . 3 0 0 RH Petrogas’ controlling shareholder has been approached by an . 0 investor and the ongoing discussions could lead to a takeover offer. 0 Our model estimates the liquidation value of the company’s assets at 0 SGD0.95/share. We see the approval of the Fuyu-1 ODP and the ongoing strong production ramp-up as significant attractions for potential investors. Maintain BUY and SGD1.23 TP.



Mar-14

Jan-14

Nov-13

0.80

Sep-13

189

Jul-13

0.90

May-13

Vol m

1.00

   

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1

RH Petrogas (RHP SP) 21 May 2014

Additional Notes Figure 1: Our NPV-and-risking model

Country Field Production / Near-production Stage Indonesia Basin current production Indonesia Island current production China Fuyu-1 Shallow Oil

Equity %

2P mmboe

60% 33% 49%

10.3 1.6

Development / Re-activation / Appraisal Drilling Stage Indonesia Basin - North Klalin Indonesia Basin - SE Walio Indonesia Island - TBC Indonesia Island - Koi Indonesia Island - North Sele Indonesia Basin unallocated Exploration Stage China Indonesia Malaysia Indonesia Indonesia

35.0 35.0

0.0

9.5 2.3 7.0 4.0 5.7 7.2 35.8

0.0

0.0 70.8

27.0 5.0 90.0 267.0 350.0 739.0 739.0

49% 94% 80% 60% 33% 0.0 11.9

Total:

Producing / near-production Development / appraisal Exploration Adjust for Group gross cash USDm) Adjust for Group gross debt (USDm) Target equity value (USDm) Shares (m) Forex rate (USDSGD)

Value (USDm) 451.0 196.9 79.3 51.9 -52.1 727.0 734.3

Equity value per share (SGD/share)

Prospective Resources mmboe

11.85 60% 60% 33% 33% 33% 60%

Fuyu-1 Deep Gas West Belida SK331 Basin - Wario & Arar Island - Koi & Sele Strait

2C mmboe

Risking %

Risked mmboe

NPV USDm

NPV USD/boe

100% 100% 100%

10.3 1.6 35.0 46.9

100.9 18.9 331.3 451.0

9.8 11.8 9.5 9.6

90% 90% 60% 75% 30% 75%

8.6 2.1 4.2 3.0 1.7 5.4 25.0

75.7 18.7 29.8 26.6 6.1 40.0 196.9

8.9 8.9 7.1 8.9 3.6 7.4 7.9

30% 10% 10% 10% 10%

8.1 0.5 9.0 26.7 35.0 79.3 151.1

8.1 0.5 9.0 26.7 35.0 79.3 727.2

1.0 1.0 1.0 1.0 1.0 1.0 4.8

0.0

Per share 0.61 0.27 0.11 0.07 Adjusted for USD21.834m received in Apr 2014 as disclosed. -0.07 0.99 1.245

1.23

Source: Company data, OSK-DMG estimates

Note: RH Petrogas’ reserves and resources figures have increased after a qualified person’s report was issued to the company in 1Q14. The 2013 annual report stated proven plus probable (2P) reserves at c.11.9m barrels of oil equivalent (mmboe) and contingent resources (2C) at c.70.8mmboe. We await clarification on the allocation of the increased reserves and resources and will update accordingly.

See important disclosures at the end of this report

2

RH Petrogas (RHP SP) 21 May 2014 Figure 2: RH Petrogas’ liquidation value of SGD0.95/share

Country Field Production / Near-production Indonesia Basin Indonesia Island China Fuyu-1 - Shallow Oil Indonesia Basin - North Klalin Indonesia Basin - SE Walio Development / Re-activation / Appraisal Drilling Stage Indonesia Island - TBC Indonesia Island - Koi Indonesia Island - North Sele Indonesia Basin unallocated Exploration Stage Indonesia China Malaysia Indonesia Indonesia

West Belida Fuyu-1 - Deep Gas SK331 Basin - Walio / Arar Island - Koi & Sele Strait

Equity

2P

2C

Prospective Resources

2P Value

2C Value

PR Value

2P Value

2C Value

PR Value

%

mmboe

mmboe

mmboe

USD/ boe

USD/ boe

USD/ boe

USDm

USDm

USDm

60% 33% 49% 60% 60%

10.3 1.6 7.1 7.0 1.5 27.5

27.9 2.5 0.8 31.2

100.9 18.9 67.2 68.9 14.8 270.7

132.0 12.3 4.1 148.4

0.0

0.0

7.0 5.0 5.7 7.2 24.9

0.0

0.0

41.4 29.6 33.7 35.6 140.3

0.0

0.0 56.2

5.0 27.0 90.0 399.6 386.0 907.6 907.6

0.0 288.7

0.0 0.0 0.0 0.0 0.0 0.0 0.0

33% 33% 33% 60%

94% 49% 80% 60% 33% 0.0 27.5

2P 2C Resources Add cash Less debt Equity value Shares (m) Forex rate

Equity value (SGD)

9.8 11.8 9.5 9.8 9.8

4.7 4.9 4.9

0.0 5.9 5.9 5.9 4.9

0.0 0.0 0.0 0.0 0.0 0.0 270.7

Value (USDm) Per Share 270.7 0.37 288.7 0.39 0.0 0.00 51.9 0.07 Adjusted for USD21.834m received in Apr 2014 as disclosed. -52.1 -0.07 559.1 0.76 734.3 1.245 USD/boe 0.95 Implicit EV/(2P+2C) Valuation 6.7

Source: Company data, OSK-DMG estimates

See important disclosures at the end of this report

3

RH Petrogas (RHP SP) 21 May 2014

Financial Exhibits Profit & Loss (USDm)

Dec-11

Dec-12

Dec-13

Dec-14F

Total turnover

89

86

86

104

152

Cost of sales

(57)

(54)

(59)

(69)

(103)

Gross profit

33

32

28

35

50

Gen & admin expenses

(5)

(5)

(6)

(6)

(7)

Other operating costs

(7)

(8)

(10)

(2)

(2)

Operating profit

20

18

12

26

41

Operating EBITDA Depreciation of fixed assets Operating EBIT

33

29

22

37

54

(13)

(10)

(11)

(11)

(13)

20

18

12

1

0

1

Other recurring income Interest expense Exceptional income - net Pre-tax profit

Dec-15F

(2) -

(2) -

26 -

(3) (73)

41 -

(4) -

(5) -

19

16

(63)

23

36

(16)

(10)

(3)

(15)

(20)

Profit after tax & minorities

3

6

(66)

7

16

Reported net profit

3

6

(66)

7

16

Recurring net profit

3

6

7

7

16

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

26

41

Depreciation & amortisation

13

10

11

11

13

Change in working capital

7

(6)

(14)

(1)

Other operating cash flow

3

5

7

43

29

15

0

0

0

(1)

(2)

(3)

(4)

(5)

(11)

(8)

(5)

(15)

(20)

Operating cash flow Interest received Interest paid Tax paid Cash flow from operations Capex

-

14 -

37 -

68 -

31

19

8

18

43

(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

29

Total cash generated

19

4

20

(23)

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 -

29

10 -

1 31

Source: Company data, OSK-DMG estimates

See important disclosures at the end of this report

4

RH Petrogas (RHP SP) 21 May 2014

Financial Exhibits Balance Sheet (USDm)

Dec-11

Dec-12

Dec-13

Dec-14F

Dec-15F

24

29

52

29

31

Inventories

5

6

1

1

1

Accounts receivable

6

9

35

29

42

Total cash and equivalents

Other current assets

1

1

1

1

1

Total current assets

35

44

89

59

74

Tangible fixed assets

65

68

73

153

192

Intangible assets

140

140

111

111

111

Total other assets

55

67

61

61

61

Total non-current assets

259

275

246

326

364

Total assets

294

319

335

385

438

1

5

14

64

74

49

49

64

57

84

6

3

2

2

2

Total current liabilities

56

58

80

123

161

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

200

238

Share capital

138

200

258

258

258

Retained earnings reserve

(28)

(19)

(80)

(73)

(57)

Shareholders' equity

110

181

177

185

201

Total equity

110

181

177

185

201

Total liabilities & equity

294

319

335

385

438

Dec-11

Dec-12

Dec-13

Dec-14F

Dec-15F

76.2

(3.4)

0.0

20.6

46.3

214.2

(8.0)

(35.1)

121.1

54.1

Net profit growth (%)

65.0

108.2

(1179.5)

0.0

113.6

EPS growth (%)

64.8

83.5

(967.0)

0.0

113.6

0.5

22.6

(18.0)

4.2

8.6

Operating margin (%)

22.4

21.3

13.8

25.3

26.7

Net profit margin (%)

3.3

7.1

(76.3)

7.2

10.4

Return on average assets (%)

1.0

2.0

(20.1)

2.1

3.9

Return on average equity (%)

2.7

4.2

(36.8)

4.1

8.3

Net debt to equity (%)

51.3

7.6

(3.0)

36.8

38.2

Recurrent cash flow per share

0.07

0.04

0.01

0.02

0.06

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) 21 May 2014

SWOT Analysis  A higher probability of discoveries in its oilfields that have existing production

 Rising oil prices could 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

140

1,300%

120

400%

100

-500%

-3,200%

20

-4,100%

0

-5,000%

P/E (x) (lhs)

Jan-15

40

Jan-14

-2,300%

Jan-13

60

Jan-12

-1,400%

Jan-11

80

EPS growth (rhs)

Source: Company data, OSK-DMG estimates

2.5

6%

2.0

-3%

1.5

-13%

1.0

-22%

0.5

-31%

0.0

-40%

P/B (x) (lhs)

Jan-15

2,200%

15%

Jan-14

160

3.0

Jan-13

3,100%

Jan-12

4,000%

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 a Chinese concession for production. Exploration and appraisal wells are being planned for concessions in Malaysia and Indonesia.

See important disclosures at the end of this report

6

RH Petrogas (RHP SP) 21 May 2014

Recommendation Chart Price Close 1.23

1.37 1.23 1.21

0.9

1.38

1.47 1.38

Recommendations & Target Price

1.33

1.0

NR

1.1

0.8 0.7 0.6 0.5 0.4 Buy 0.3 May-09

Neutral

Sell

Aug-10

Trading Buy

Dec-11

Take Profit

Not Rated

Mar-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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