SINGAPORE (Mar 6): For oil explorer and producer Interra Resources, staying prudent has always been key to remaining viable as the global oil industry struggles with stagnant demand, over-supply, and subdued prices. “Interra tends to take a conservative approach, be it in terms of our estimates or company operations,” CEO Marcel Tjia tells The Edge Singapore in an interview.
“But as long as the world economy doesn’t completely collapse, we have a favourable outlook for the coming year,” says Tjia, who runs the Singapore-listed company which has operations in Indonesia and Myanmar.
Compared to the trough of 2016, crude oil prices have doubled in the past two years — although the recent Covid-19 outbreak has caused slowdown fears and therefore dampened prices for now. While Tjia says that Interra is looking to take advantage of the upward trend in oil prices by ramping up its production in both Indonesia and Myanmar, he stresses the importance of moving at a sustainable pace instead of charging ahead. “Given our size as a company, we have to be smart in how we think about things such as acquisitions and spending,” he says.
Drill, test, drill
On Dec 11 last year, Interra reported positive drilling and testing results from its well in the Kuala Pambuang block in Central Kalimantan, Indonesia, in which it holds a 67.5% stake. The well is undergoing further tests and analysis, with samples of oil being tested for quality. “Live oil shows over several zones were recorded while drilling in the primary reservoir targets by borehole cuttings analysis,” the company states in a filing. Tjia is optimistic that the company will soon be doing more in this field, including drilling a second well.
However, Interra is unlikely to reap any immediate revenue contributions from the well over the next three quarters. Tjia claims that this is “a good problem to have” as the group works to conduct perforation testing which will better ascertain the quality of oil present.
“The first step was to see if there was oil present. If there was no oil present in the well, we would have walked away immediately. Following our discovery, we are going for a proper completion of the well, to make it more ready for proper production,” says Tjia. “We are looking to complete this by the end of April, but to do that we need to bring in more materials and resources.”
Interra now has two fields in Myanmar which have been producing since the 1880s: the Chauk Field and the Yenangyaung Field.
The original contract awarded to the group was for 20 years, but was recently extended for 11 years, which will see the group continuing its operations there till April 2028.
In a regulatory filing on Jan 20, Interra reported that it had commenced the drilling of wells in its Chauk oil field in Myanmar, with the results of the drilling and completion estimated to be unveiled in some six weeks. The company expects the drilling to reach multiple reservoirs underneath this field.
Meanwhile, Interra’s contracts in Indonesia have experienced some stumbling blocks. Until recently, the company had two producing fields in South Sumatra and Papua. But according to Tjia, these fell through as the end contract terms were “unfavourable” for the company. He declined to elaborate. “As such, we had to pull out of these two fields, and we are left with one.” Tjia says that Interra operates in both Myanmar and Indonesia for one key reason — the low cost of operations. “Production costs in Myanmar and Indonesia are relatively low, which has helped us garner a positive operating cashflow thus far. These two countries have also changed their regulations a fair bit, in terms of being more open to mining and exploration,” he says.
Commodity producers like Interra Resources have to accept market prices for their production, but they do have a bigger control over their own costs, and that is what Tjia is focused very much on.
He knows he is far from the heft of oil majors such as BP and Chevron, whose deep pockets can easily fund new capex. Tjia’s focus is to be as efficient as possible, and not incur capex unless really needed. “We are constantly looking for ways to improve efficiency and lower our costs of production. We are always speaking to contractors to see what can be done to further improve this,” he says.
According to Tjia, the new discoveries in both Myanmar and Indonesia will keep the group’s operating cashflow positive for the next eight to nine years. To fund further growth, Interra has to either drill more wells, or acquire new concessions. “We are always on the lookout for acquisitions, but we choose to take a cautious approach in these activities,” says Tjia, adding that there are several “boxes to tick” before a field makes the cut. For example, he is looking to form joint ventures instead of undertaking whole projects alone.
Tjia’s cautious stance is for a good reason. The company, back in 2006, worked up the appetite to venture out of its onshore zone and acquire stakes in offshore fields from a Japanese company. The global oil market was then surging to an all-time-high of above US$140 in March 2008. Everybody wanted a piece of the oil business. However, the high capital expenditure requirements and a more complicated environment had resulted in the group selling their shares at a gain just two years after, amid a spectacular slump in prices.
“There’s a huge capex difference between the offshore and onshore industries, and for a company our size, we’ve learnt that it is in our best interests to stay onshore,” says Tjia. “We have no plans to go into the offshore segment again for the time being.”
Key inflexion point
On Feb 26, the company reported its FY2019 financial results. For the 4QFY2019 ended December 2019, revenue increased by 6% y-o-y to US$3.95 million ($5.5 million). It recorded earnings of US$589,000 — a turnaround from losses of US$435,000 incurred in the year earlier.
In FY2019, the company sold 314,467 barrels of oil, up from 266,531 barrels in FY2018. However, the oil in FY2019 was sold at a lower weighted average price of US$63.13, compared to US$67.95 per barrel. Net effect was that revenue for the full year was up 5% y-o-y to US$15.7 million.
However, for the full year, the company was US$478,000 in the red, compared to earnings of US$848,000 in FY2018. This was partly because of higher costs of production. From US$7.99 million in FY2018, Interra Resources incurred US$9.97 million pumping the oil out from the ground and accounting for higher depreciation charges. Cash and equivalents as at Dec 31, 2019, was US$2.78 million. Interra Resources’ net asset value as at Dec 31, 2019, was 4.543 US cents, a slight dip from 4.624 US cents as at Dec 31, 2018.
“While our profitability has been prone to fluctuations in tandem with oil prices, our underlying cashflow has always been positive,” says Tjia. “But while we’ve recently enjoyed a cushion from the higher oil prices, we have to ensure that we maintain a disciplined cost structure nonetheless.”
Over the past year, Interra’s share price has gained 120% to close at 6.6 cents on March 4. Even so, Tjia still believes that investors are still “severely undervaluing” the company.
According to SAC Capital analyst Terence Chua, the research house’s target price of 8.9 cents excludes the recent discoveries in both Indonesia and Malaysia. “We choose to maintain a zero (value) until [the company] proves otherwise approach to our valuations, and as such the valuation price target we have on Interra today excludes the potential upside from the new discoveries,” Chua tells The Edge Singapore.
He believes Interra is a “key inflexion point”, where higher oil prices and contract extensions will help drive earnings. With more than nine years rights to produce from the two Myanmar fields, the company gets plenty of elbow space to produce more — the pace to be determined by what prices are, which, in turn, guides the amount of capex to be committed.
“Like most oil production companies, Interra is dependent on the price of oil, which will affect their revenue and profit. With that said, however, given that they are an onshore player, their overall cost of production is significantly lower than those of the offshore players,” adds Chua.
Following the group’s 4QFY2019 results, Chua remains unfazed. “I think Interra will report higher profit numbers for FY2020,” he says.
“We think their recent results also show a positive turnaround from their loss from the previous year, which is good news for them.” However, on the back of the ongoing Covid-19 outbreak, the brokerage chooses to err on the side of caution. Although Chua had initially expected Interra to report higher profits for FY2020, he is now bracing himself for a dip in the group’s financial metrics as the spread worsens.
“The effect of Covid-19 could affect [Interra’s] financials for FY2020 as global commodity prices, including Brent Crude oil prices, have already tumbled significantly. If prices remain at this level, we think will likely see [their] revenue being impacted negatively,” he says.
But all is not lost. Chua acknowledges that the company has strengths to use to its advantage, including its healthy balance sheet and net cash position, as well as the long contracts for its fields which each have more than nine years left. “The biggest worry as always, however, will be the price of oil,” adds Chua.
