UOB Kay Hian analyst Adrian Loh has maintained “market weight” on the oil & gas (O&G) sector as the two companies within the brokerage’s coverage, RH Petrogas and Rex International even out.
Seeing Rex as the yin to RH Petrogas’ yang, Loh has kept his “buy” call on the latter with a target price of 25 cents.
In his July 25 report, Loh notes the “exciting” programme for the 2HFY2023 for RH Petrogas, which highlights an “interesting high risk/high reward period for investors in the stock”.
On July 21, RH Petrogas announced that it has spudded the Riam-1 oil exploration well at its Kepala Burung production sharing contract (PSC).
While the well will take around 30 days to be drilled a proposed total depth of 4,300 feet (1,310m) with potentially another 30 days of testing before any results can be seen, Loh notes that the exploration risk at Riam-1 is “relatively low” given that it is located just 3km west of RH Petrogas’ Walio field. The Walio field currently accounts for over 50% of Kepala Burung’s oil production.
According to RH Petrogas, the well can be put on production “reasonably quickly” in the event of a discovery.
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Further to the Riam-1 oil exploration well, the company says it plans to drill another three wells in the 2HFY2023 with the key highlight being the Karuka-1 gas exploration well as its Kepala Burung PSC. The Karuka-1 gas exploration well will target 1.8 trillion cubic feet (tcf) of natural gas or 33 million barrels of oil equivalent (mmboe), which is “material” compared to RH Petrogas’ company size.
“Using recovery factors of between 10% - 25% and risking the four wells at between 50% - 80% for both geological and commercial risk, we arrive at a total valuation of 13 cents a share for RH Petrogas’ drilling programme,” says Loh.
“This represents potential upside of 63% based on [RH Petrogas’] closing price [of 20.5 cents as at July 24]. Note that we have factored in much higher risking factors for both Piarawi-1 and Karuka-1 given that they are both deeper wells and are targeting new geological play types,” he adds.
See also: RH Petrogas commences drilling of new exploration well
In contrast, fellow O&G company Rex International is still struggling, seeing a 22% m-o-m decline in production in June.
“Rex’s Yumna field continues to disappoint – again due to another unexplained and unplanned shutdown. Over the past two years, Yumna’s oil production has declined by [over] 70% with the company unable to explain to the market why – despite new production facilities having been installed – it has been able to resume production at the 9,000-12,000 barrels per day (bpd) levels seen in 2021,” notes Loh.
In addition, Rex’s new production well at Brage was unable to offset the weakness at Yumna, which resulted in the company’s overall production decline of 4% on a m-o-m basis.
The analyst notes: “For 1HFY2023, Rex’s average production of over 9,200bpd was 12% higher y-o-y; however this was more than offset by the Brent oil price which averaged just under US$80 ($105.87) per barrel (bbl) in 1HFY2023, a 24% decline versus the US$104/bbl levels seen in 1HFY2022.”
As such, Rex is unlikely to report a strong net profit for the 1HFY2023, in his view.
As Loh has kept his “sell” call on Rex with a target price of 10 cents, he is recommending investors go long on RH Petrogas and short on Rex.
“Given the dichotomy in the two companies’ near- to medium-term prospects and the large gap in the market’s valuation of their reserves, we recommend investors to long RH Petrogas and short Rex,” he writes.
“RH Petrogas presents a high risk/high reward scenario tied to its exploration success in the next six months while Rex continues to disappoint on the operational front,” he adds.
As at 3.25pm, shares in RH Petrogas and Rex are trading at 21 cents and 18.5 cents respectively.
