UOB Kay Hian analysts Llelleythan Tan, John Cheong and Adrian Loh are maintaining their “sell” call on Rex International Holding 5WH with an unchanged target price of 10 cents, after the company released its latest operation data for the month of October.
The analysts’ target price is based on a 0.5x P/B instead of the usual discounted cash flow methodology, due to their “diminished confidence” in the company’s ability to execute on its oil production targets.
On Nov 14, Rex announced that its 91.81%-owned Yumna Field in offshore Block 50 in Oman only managed an “anaemic” 1,304 barrels per day (bpd) of oil production, showing a 20% m-o-m and 65% y-o-y decline.
The latest problem at the field was a shutdown in production on Oct 25 due to “damage to the internal pressure containing liner of the newly installed larger flowline”, Rex explained in its statement.
The analysts, in their Nov 27 report, note that no guidance was given as to when the field, which produced an average of nearly 11,000bpd in 2021, would be re-started.
“With Yumna continuing to underperform, Rex’s average production year-to-date (ytd) stands at just over 9,000 bpd and is far from its 20,000 bpd target,” they write.
The company’s lack of disclosure was also a concern to the analysts who note that there was no breakdown of production from its Brage and Yme fields in Norway although the fields’ combined production exceeding 10,000 bpd in the last week of October was a plus.
“This may imply that the Yme field continues to experience problems given the higher-than-expected water cuts that have been reported by its operator in the past. Brage meanwhile has remained a strong performer with a new well brought on-stream in late-October and another in early-November, and recently made a 1 million barrels (mmbbl) discovery,” add the analysts.
Rex also hasn’t been managing its expenses well.
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Despite the successful hook-up and commissioning of the new floating storage tanker and mobile offshore production unit (MOPU) at its key Yumna asset offshore Oman 1.5 years ago, Yumna’s production continues to be below expectations. This is attributed to “a lack of availability” of jack-up rigs offshore Oman to “service the problematic field”, say the analysts.
Due to the number of Middle Eastern national oil companies having tied up such assets and the prohibitive cost of bringing in rigs from Europe or Asia, Tan, Cheong and Loh believe that Yumna will continue to face production issues in the near to medium term.
Overall, the analysts have not changed their earnings forecasts although they highlight downside risks to the company’s financials given its poor production performance.
“Higher interest expense will also hit its bottom line given that as at end-1HFY2023, it had net debt of US$58.7 million ($78.6 million) versus net cash of US$27.0 million at end-1HFY2022,” they write.
Rex’s latest acquisition - the 17% stake in the Brasse Field by its 91.65%-owned subsidiary Lime Petroleum - has not been factored into the analysts’ financial model as the company was not able to disclose its purchase price.
However, they note that “the proximity” of the Brasse field will have “significant positive synergies” with Rex’s Brage asset.
Share price catalysts noted by Tan, Cheong and Loh include Rex’s refraining from related-party transactions in sectors that are unrelated to oil and gas, better consistency and reliability in delivering oil production numbers and removal of the opacity surrounding its spending on mergers and acquisitions (M&A) and capital expenditure (capex) items.
As at 1.40 pm, shares in Rex International Holding are trading at 0.2 cents lower or 1.18% down at 17 cents.
