Translate This Page

Wednesday, January 4, 2017

Brokers Report: Reach Energy Bhd - New Oil Junior in town



Trading BUY with a target price (TP) of RM0.83



Highlights


  • Now an O&G Junior. Upon getting vote acceptance for QA on 16th Nov 2016, Reach will now become a full-fledged oil junior with final adjusted Purchase Consideration worth US$175.9m. Acquisition has been completed on 27th November 2016 with dissenting shareholders already being repaid.
  • Emir-oil a balanced portfolio with high quality crude. Situated in Kazakhstan, currently Emir-oil possesses 4 producing fields coupled with 2 development fields and 6 drillable prospects, pointing to high potential growth in pipeline of reserves. In addition, it also produces high value light and sweet crude oil and possesses high condensate yield in one of its producing fields, indicating more room to further monetize the acquired asset.
  • Oil asset was bought at low. While the oil market has been subdued for a long time, we believe the upstream asset acquired by Reach was at the lowest price possible. The acquisition price was determined on 4th March 2016 when Brent was at US$37/bbl, not far off from its multiyear low of US$27/bbl. This shows that Reach would be able to reap full benefit of long term oil price recovery with minimal downsides. Current Brent price is at US$57.5/bbl. 
  • Building CPF to unlock oilfield potential. MIEH (vendor for the QA) has already invested in a Central Processing Facility (CPF). Phase 1 is expected to be completed in several months time and upon completion of the pipelines in 2018, Reach could easily double its oil production to more than 10,000 bbls/day by executing more well completion and drilling more wells in its proven areas. Phase 2 would again bring its oil production to level in excess of 20,000bbls/day upon completion, indicating vast opportunity to reap more value from its oil reserves.
  • Market ‘under pricing’ its long term prospects. At the current share price of RM0.66, market seems to have only price in long term oil price of US$67/bbl (for 20-year time frame) - based on our backward calculation of assuming other variables being constant. We are of the view that oil prices would eventually recover to US$57/bbl beyond the implied level as oil market rebalances while cost of oil production is expected to rise in the long run.


Catalysts


  • Direct beneficiary of oil price rally.
  • Entering into production asset early stage providing more upside possibility.


Risks


  • Oil production natural decline, oilfield operational risk, country risk.



Rating


BUY (NEW)
  • Minimal downside risk at this price point while the company is expected to escalate to the next level by tapping into the reserves of a young oilfield with limited risk of straining balance sheet.


Valuation


  • Our discounted FCFE (10% discount rate) approach has yielded a TP of RM0.83 at fully diluted level (assuming dilution from potential placement and full exercise of warrants). Near term exercise of warrants is unlikely as the expiry date has been extended for another 5 years to 2022 post acceptance of QA by its shareholders. To illustrate, excluding dilution impact from warrants, our TP would be at RM0.91.



Source: Hong Leong Investment Bank Research - 04 January 2017

No comments:

Post a Comment