UOB Kay Hian analyst Adrian Loh has initiated a “buy” call on RH Petrogas T13 with a target price of 25 cents, which represents a 25% upside to the company’s last-closed price of 20 cents on April 4.
RH Petrogas is an independent oil and gas company that’s focused on its operations in Indonesia. The company sold off two of its assets in China and Malaysia over the past five years and currently has two producing assets in Indonesia.
To Loh, the company has a “solid track record” of operating its two mature oil fields onshore in Indonesia. The company has shown its “strong execution ability” with a production compound annual growth rate (CAGR) of 4.3% over FY2018 to FY2022. Its cash cost per barrel of oil equivalent, however, had risen by a mere CAGR of 0.6% over the same period.
More importantly, Loh is positive on RH Petrogas’ proved and probable (2P) oil and gas reserves, which have grown by a CAGR of 6.3% and 63.8% to 28.6 million barrels (mmbbl) and 21.6 billion cubic feet (bcf) respectively as at Jan 1. The growth implies a reserves-to-production ratio of over 18 years, says Loh.
The analyst also likes the company’s key initiatives that were made in FY2021 to strengthen its balance sheet. This took place in the 3QFY2021 when RH Petrogas’ major shareholders converted their interest-free shareholder loans amounting to US$15.5 million ($20.5 million) into equity in the company at 17.2 cents per share.
The move resulted in RH Petrogas’ negative equity position as at end-FY2020 turning positive at the end of the FY2022, where it had zero debt and US$57 million in cash, which is equivalent to 9 cents per share.
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In addition, Loh sees potential positive news flow for the company in 2023 with its plans to drill three potentially high-impact wells in the 3QFY2023. Two of the three wells are exploration wells and are located in its two producing assets in Indonesia, Kepala Burung Production Sharing Contract (PSC) and the Salawati PSC in West Papua. There is also one development well in the Kepala Burung PSC.
“According to RH Petrogas, its seismic data indicates that its exploration well at Kepala Burung will target 1.8 trillion cubic feet (tcf) of natural gas which would be material to a company of RH Petrogas’ size,” says Loh.
“We have not valued this exploration upside yet. Given its net cash position, we believe RH Petrogas may also look to acquire or farm into high-quality assets in Asia,” he adds.
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Based on Loh’s forecasts, RH Petrogas’ FY2023 P/E of 6.0x and ev/ebitda of 2.3x are at discounts to its regional oil and gas peers at 23% and 30% respectively.
Shares in RH Petrogas closed 0.1 cent lower or 0.5% down at 19.9 cents on April 5.
