Results Review, 4 March 2014
RH Petrogas (RHP SP)
Buy (Maintained)
Energy & Petrochemicals - Upstream Oil & Gas Market Cap: USD298m
Target Price: Price:
SGD1.21 SGD0.52 Macro Risks
With The Worst Over, a Better FY14 Awaits
Growth Value
RH Petrogas (RHP SP) Price Close
Relative to Straits Times Index (RHS)
0.90
179
0.80
159
0.70
139
0.60
119
0.50
99
0.40 40 35 30 25 20 15 10 5
79
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Source: Bloomberg
Avg Turnover (SGD/USD) Cons. Upside (%) Upside (%) 52-wk Price low/high (SGD) Free float (%) Shareholders (%) Tan Sri Datuk Sir Tiong Hiew King
2.03m/1.60m 182.7 135 0.47 - 0.92 35
64.6
Shariah compliant
FY13 core earnings of USD7.1m. Adjusting for USD44m of write-offs for seven wells drilled in 2011-2013 and USD29m impairment on goodwill, RH Petrogas (RHP)’s FY13 core profit was USD7.1m. With its balance sheet now clean, we believe the worst is over and we expect a return to profitability and higher cash flows in FY14. Adjusted EBITDAX rises 7%. More crucially for an exploration & production company, EBITDA before exploration (EBITDAX) was up 7% to USD33.3m. We raise its EBITDAX by the USD4.4m in inventory obsolescence charges, which is non-cash and should be part of normal EBITDAX in our view. FY14 production likely ~4,700 barrels of oil equivalent/day (boepd). RHP’s February production is back to 4,300boepd and three more wells are coming online in March. The half-year contributions from Fuyu and those estimated in a potential 1H14 acquisition will make up the difference to 4,700boepd in FY14. Dec 2014’s exit production rate should be c.5,000boepd, as the floating, production, storage and offloading vessel for the offshore TBA field arrives and begins producing. Enough cash to last till late FY15. RHP’s cash in hand totals USD52m. Adding the normalised USD20m/year operating cash flow and assuming zero production growth, the effective cash balance through FY15 is USD92m. As its FY14 work programme only costs USD45m, RHP has sufficient cash through at least late-FY15. Assets remain deeply undervalued. Its valuations suffered from the Oct 2013 small-cap saga fallout and investors’ over-reaction to its dry holes. We see at least SGD0.77/share in liquidation value and, based on our NPV-and-risking model, our TP remains at SGD1.23. RHP is the alpha Top Pick in our oil & gas universe and remains on track to upgrade 19m barrels of oil equivalent (mmboe) of 2C to 2P reserves, trebling the 2P figure.
Forecasts and Valuations Total turnover (USDm) Reported net profit (USDm) Recurring net profit (USDm)
Dec-11
Dec-12
Dec-13
Dec-14F
89
86
86
104
Dec-15F 152
2.9
6.1
(65.9)
7.5
15.9
7.5
2.9
6.1
(65.9)
Recurring net profit growth (%)
65.0
108.2
(1179.5)
Lee Yue Jer +65 6232 3898
Recurring EPS (USD)
0.01
0.01
(0.10)
[email protected]
Recurring P/E (x)
63.3
34.5
P/B (x)
1.69
1.38
6.0
11.0
7.34
7.72
2.7
4.2
(36.8)
4.1
8.3
51.3
7.6
net cash
36.8
38.2
(11.3)
(13.0)
Jason Saw +65 6232 3871
P/CF (x)
[email protected]
EV/EBITDA (x) Return on average equity (%) Net debt to equity (%) Our vs consensus EPS (%)
na
15.9 113.6
0.01
0.02
40.0
18.7
1.68
1.61
1.49
34.6
16.7
7.0
9.76
6.97
na
na
Source: Company data, OSK-DMG estimates
See important disclosures at the end of this report
2 . 3 0 . 3
0 0 . 3 0 0 With its balance sheet cleaned up, RHP is starting FY14 on a clean . 0 slate. Its current ~4,300boepd production is up from FY13’s 4,130boepd 0 average, with three more wells starting production in March. Adjusted 0 FY13 EBITDAX is USD33.2m (+7% y-o-y). With this cash flow and USD52m cash in hand, RHP has enough funds up to late-FY15. Its assets remain deeply undervalued. Maintain BUY and SGD1.23 TP.
Mar-13
Vol m
1.00
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1
RH Petrogas (RHP SP) 4 March 2014
Additional Notes Figure 1: RHP’s annual results in review USD ('000) Revenue
FY12 86,376
FY13 86,393
y-o-y 0%
Cost of sales Gross profit Other income Administrative expenses Other operating expenses
(54,179) 32,197 39 (5,319) (8,487)
(58,720) 27,673 1,442 (6,114) (82,595)
8% -14% nm 15% nm
Finance costs Share of profit / (loss) from JV Profit before tax Income tax expense
(2,222) 0 16,208 (10,105)
(3,340) 0 (62,934) (2,949)
50% -488% -71%
Core PBT of USD13.9m in FY13 after adjustments. Decrease in income taxes is due to lower charges for both deferred and current income taxes for Basin PSC and Island PSC in FY13.
6,103
(65,883)
nm
Core earnings of USD7.1m in FY13, adjusting for USD73m of write-offs and impairments.
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
FY12 16,208 1,811 437 10,389 411 1,502 0 0 456
FY13 (62,934) 2,563 422 10,531 777 44,213 28,758 4,557 4,356
y-o-y
EBITDAX
31,214
33,243
7%
Minority interest PATMI
Reasons Maintained revenue though production was 4% lower due to higher cost recovery component. FY13 production affected by 5 months of power outage for some wells, where an estimated 150boepd of production was lost for the full year. Current production as of Feb 2014 is back to 4,300 boepd with three wells coming online in March. Increased cost of production. USD1.4m of unrealised forex gains in FY13. Change mainly due to share option expense increase of USD0.4m and higher staff costs. FY13: USD44m write-off for seven dry wells drilled between 2011 and 2013; USD29m impairment of goodwill; USD4.4m inventory obsolescence charge. Higher bank borrowings and unwinding of discount on decommissioning provisions.
Source: OSK-DMG
A peek at Koi development plan. The presentation materials included a very interesting contour map of the Koi field that shows the net volumes of oil in ground and the planned locations of a total of 10 development wells. We understand that the production infrastructure will involve two fixed platforms as well as one floating, production, storage and offloading (FPSO) vessel. This FPSO will in fact be the same one that will be servicing the nearby TBA field from Dec 2014. After the TBA field reaches end-of-life in 2016, the vessel will then be moved to Koi to begin production. Figure 2: Koi field development plan
Source: Company data
See important disclosures at the end of this report
2
RH Petrogas (RHP SP) 4 March 2014
Figure 3: 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
60%
7.8
100%
7.8
90.9
11.7
Indonesia
Island
33%
1.7
100%
1.7
18.9
11.1
China
Fuyu-1 Shallow Oil
49%
100%
35.0
331.3
9.5
44.5
441.1
9.9
35.0 9.5
35.0
0.0
Development / Re-activation / Appraisal Drilling Stage Indonesia
Basin - North Klalin
60%
9.5
90%
8.6
89.7
10.5
Indonesia
Basin - SE Walio
60%
2.3
90%
2.1
22.1
10.5
Indonesia
Island - TBC
33%
7.0
60%
4.2
28.1
6.7
Indonesia
Island - Koi
33%
4.0
75%
3.0
25.1
8.4
Indonesia
Island - North Sele
33%
5.7
30%
1.7
5.7
3.3
19.6
170.6
8.7
0.0
28.5
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%
180.0
10%
18.0
18.0
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
829.0
88.3
88.3
1.0
9.5
63.5
829.0
152.4
700.1
4.6
Value (USDm)
Per share
Producing / near-production
441.1
0.60
Development / appraisal
170.6
0.23
Exploration
88.3
0.12
Adjust for Group gross cash USDm)
62.4
Adjust for Group gross debt (USDm)
-51.7
-0.07
Target equity value (USDm)
710.8
0.97
Shares (m)
733.3
0.09 Adjusted for est. 1Q14 receivables collected less payables paid.
Forex rate (USDSGD)
1.26
Equity value per share (SGD/share)
1.23
Source: OSK-DMG
Note: We have taken the pre-emptive step of reducing our estimated 2P reserves in the Basin and Island producing areas to take into account FY13 production. The actual figure may differ upon the release of a qualified person report.
See important disclosures at the end of this report
3
RH Petrogas (RHP SP) 4 March 2014 Figure 4: RHP’s liquidation value estimate
Country Field Production / Near-production Indonesia Basin Indonesia Island China Fuyu-1 - Shallow Oil Development / Re-activation / Appraisal Drilling Stage Indonesia Basin - North Klalin Indonesia Basin - SE Walio Indonesia Island - TBC Indonesia Island - Koi Indonesia Island - North Sele Exploration Stage China Indonesia Malaysia Indonesia Indonesia
Fuyu-1 - Deep Gas West Belida 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%
7.8 1.7
109.9
165.6 165.6
0.0
0.0
55.4 13.6 39.0 22.7 31.7 162.4
0.0
0.0 328.1
0.0 0.0 0.0 0.0 0.0 0.0 0.0
11.7 11.1
9.5
35.0 35.0
0.0
9.5 2.3 7.0 4.0 5.7 28.5
0.0
0.0 63.5
27.0 5.0 180.0 267.0 350.0 829.0 829.0
60% 60% 33% 33% 33%
49% 94% 80% 60% 33% 0.0 9.5
Total
2P 2C Resources Add cash Less debt Equity value Shares (m) Forex rate (USDSGD)
Equity value (SGD)
90.9 18.9 4.7
0.0 5.8 5.8 5.6 5.6 5.6
0.0 0.0 0.0 0.0 0.0 0.0 109.9
Value (USDm) Per Share 109.9 0.15 328.1 0.45 0.0 0.00 62.4 0.09 Adjusted for estimated 1Q14 receivables collected less payables paid. -51.7 -0.07 448.6 0.61 733.3 1.26 USD/boe 0.77 Implicit EV/(2P+2C) Valuation 6.1
Source: OSK-DMG
Note: This estimate is highly conservative – with only one more approval required for the Fuyu-1 field. Its liquidation value should be higher than the value we impute, which applies a 50% discount to the field’s NPV. Taking 100% of this NPV into consideration, RHP’s liquidation value will jump to SGD1.06/share. Hence, we see the receipt of this final approval as a key re-rating catalyst in FY14.
USD45m work programme for 2014. RHP has announced a USD45m capex plan for 2014, which includes eight development wells in Indonesia, 40 in China, and one exploration well in China that is targeting the deep gas in the Fuyu field. Early-stage exploration continues in West Belida and SK331 in Indonesia and Malaysia respectively. Figure 5: RHP’s 2014 work programme
Source: Company
See important disclosures at the end of this report
4
RH Petrogas (RHP SP) 4 March 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)
(83)
(2)
(2)
Operating profit
20
18
(61)
26
41
Operating EBITDA Depreciation of fixed assets Operating EBIT
Dec-15F
33
29
(51)
37
54
(13)
(10)
(11)
(11)
(13)
20
18
(61)
1
0
1
Other recurring income
26 -
41 -
Interest expense
(2)
(2)
(3)
(4)
(5)
Pre-tax profit
19
16
(63)
23
36
Taxation
(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
(66)
7
16
Source: Company data, OSK-DMG estimates
Cash flow (USDm)
Dec-11
Dec-12
Dec-14F
Dec-15F
Operating profit
20
18
(61)
26
41
Depreciation & amortisation
13
10
11
11
13
Change in working capital
7
(6)
(14)
(1)
Other operating cash flow
3
5
80
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
Dec-13
-
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
5
RH Petrogas (RHP SP) 4 March 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)
(431.9)
0.0
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
(70.6)
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
6
RH Petrogas (RHP SP) 4 March 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
200
4,000%
1.80
15%
180
3,100%
1.60
9%
160
2,200%
1.40
3%
140
1,300%
1.20
-3%
120
400%
1.00
-9%
100
-500% 0.80
-16%
0.60
-22% -28%
80
-1,400%
60
-2,300%
P/E (x) (lhs)
EPS growth (rhs)
Source: Company data, OSK-DMG estimates
Jan-15
Jan-13 P/B (x) (lhs)
Jan-14
-40%
Jan-12
0.00
Jan-11
-5,000%
Jan-15
-34%
0
Jan-14
0.20
Jan-13
-4,100%
Jan-12
-3,200%
20
Jan-11
40
0.40
Return on average equity (rhs)
Source: Company data, OSK-DMG estimates
Company Profile RH Petrogas is an exploration & production company with oil & 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 too.
See important disclosures at the end of this report
7
RH Petrogas (RHP SP) 4 March 2014
Recommendation Chart Price Close 1.37 1.23
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 Mar-09
Neutral
Sell
Jun-10
Trading Buy
Sep-11
Take Profit
Not Rated
Dec-12
Source: OSK-DMG estimates, Bloomberg Date
Recommendation
2014-02-25
Buy
Target Price Price 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
2013-10-03
Buy
1.33
0.90
2013-10-01
Buy
1.47
0.71
Source: OSK-DMG estimates, Bloomberg
See important disclosures at the end of this report
8
RHB Guide to Investment Ratings DMG & Partners Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share may10% exceed over 12 themonths next 3 months, however longer-term outlook remains uncertain Buy: Share price mayprice exceed over15% the next Neutral: Buy: ShareShare price price may fall within the 15% rangeover of +/the next 12 months Trading may exceed the10% nextover 3 months, however longer-term outlook remains uncertain Take Profit: Target been attained. accumulate lower Neutral: Share priceprice may has fall within the rangeLook of +/-to10% over theatnext 12 levels months Sell: may fall has by more 10% Look over the next 12 months Take Share Profit:price Target price beenthan attained. to accumulate at lower levels Not Rated: is not regular coverage Sell: Share Stock price may fallwithin by more thanresearch 10% over the next 12 months Not Rated: Stock is not within regular research coverage Disclosure & Disclaimer DISCLAIMERS All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as & to Partners its accuracy, completeness or correctness. 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