(Aug 19): Rex International’s recent share buyback is a curious case of resource allocation. On Aug 15, the oil exploration and production company bought 897,100 shares from the market at 6.4 cents apiece. This follows an earlier purchase of 1.4 million shares on Aug 13 at the same price.
The company can buy back up to 129 million shares, or 10% of its issued share capital base.
Rex International’s initial share buyback was transacted on the day it released a mixed set of financial results for the second quarter ended June 30. The company reported earnings of US$23.6 million ($32.8 million), reversing from a net loss of US$2.7 million a year ago. However, it recorded no service revenue during the quarter and did not elaborate on that. Compare this with its year-ago revenue of US$90,000, which was derived from technical services rendered to external clients by its subsidiary, Rex Technology Management.
Rex International’s return to the black was the result of a surge in other income to US$29.4 million, from US$90,000 last year. This came mainly on the back of a gain from the sale of licence interests to a third party for US$45 million. The company did not specify which licences were sold.
But Rex International said the transaction was approved by the authorities in early May and completed on May 29. The company received a cash payment of US$43 million, before accounting for any expenditures and payments of cash calls relating to the sale of licences. It will receive the remaining US$2 million upon the absence of any adverse event 12 months from the completion date.
As a result of the sale, Rex International had a net cash position of US$12.86 million as at June 30. This translates into 14.9% of its market capitalisation of $86.4 million on Aug 14. If the proceeds from the sale of the licences were excluded, however, the company would have a net debt position of US$33.57 million.
Given the persistent slump in the oil and gas (O&G) industry since mid-2014, which has led to many companies’ going bust, why did Rex International choose to buy back its shares? Would it not have been better for the company’s cash to be used for working capital and ensure its going concern? How does buying its own shares benefit the company?
Indeed, the outlook of the O&G industry continues to be bleak. DBS Group Research has lowered its 2H2019 and 2020 forecasts for Brent crude oil prices to average US$65 per barrel, down from US$70 to US$75 per barrel. This factors in a more conservative oil demand scenario as the trade disputes between the US and China drag on.
“In the bear-case scenario of further intensification of trade wars following the next round of negotiations, we would not be surprised if Brent tests the US$55 per barrel level again,” DBS analysts Suvro Sarkar and Ho Pei Hwa write in an Aug 6 note.
If oil prices were to fall again, it would discourage exploration and production activity and, in turn, hurt the company’s prospects. Rex International says it is “actively” monitoring the continued volatility of crude oil prices, as it aims to achieve first oil in Oman at year-end.
