The oil and gas industry is one to pay attention to these days. As at Oct 13, WTI crude oil prices were trading at US$87.22, while Brent crude oil prices were at US$92.55.
This is all thanks to Opec+ agreeing on Oct 5 to curb supply of oil production in an already tightly supplied market. Opec+ is a group of 23 oil-exporting countries including the 13 members of Opec.
Opec+ leader Saudi Arabia announced a cut of 2 million barrels per day of output, which translates to about 2% of the global supply. Opec+ says this was a necessary response to the rising interest rates and the weaker global economy. Meanwhile, Russia may impose a temporary production cut and has refused to sell oil to countries that capped prices.
While the big boys in the industry are caught up in the drama, smaller players such as Singapore-listed Rex International sees an opportunity to ride on a long-awaited recovery in oil prices for near- to mid-term growth.
Speaking to The Edge Singapore, executive chairman of Rex International Dan Broström says: “We continue to be an opportunistic and entrepreneurial company… We are not looking to compete with the big guys — they have their own market. But we’re certainly in it too and on a smaller scale.”
Broström adds that Rex is the one to go to “if you need to be quick and very entrepreneurial” and to extract oil at a low cost and at a profit. This is the strategy that Rex has implemented and it intends for it to drive its own growth.
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Rex is an exploration and production (E&P) company that is in the business of exploring and producing offshore oil.
Under its exploration segment, it has managed to de-risk its portfolio of exploration and development assets using its proprietary liquid hydrocarbon indicator Rex Virtual Drilling technology, which can locate oil reservoirs in the sub-surface using seismic data. This technology helps the group increase its success rate of finding oil. It also offers its Rex Virtual Drilling screening services to other oil exploration companies.
According to Broström, finding oil is no easy feat. Perhaps that is why the phrase “to have struck oil” is highly associated with good luck. “In our business, we have to be clever, work hard and have luck. Luck always plays a big part in this business,” says Broström, who elaborates that only about 15% of the time oil is actually found during the exploration stage.
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If luck is on Rex’s side during the exploration stage, it can move into the production stage, which is where the bulk of the money is spent and earned. Thus far, thanks to the Rex Virtual Drilling Technology, the group has made four offshore discoveries — one in Oman and three in Norway.
With those discoveries, the group has secured interests in exploration and production licences in Oman, Norway and Malaysia, and holds operatorship for the assets in Oman and Malaysia. The group’s presence in Malaysia is still currently in the exploration stage.
If the exploration stage fails, Broström explains that this is when they pack up and leave. The money spent during this stage — that could range from $5 million to $100 million — is just gone. But once the company has “struck oil”, the production will last a long time and profits will be ensured for as long as the well can produce.
“About 75% of the time during the exploration stage, you find a dry well and there’s nothing to bring into the production stage. So we just plug it up and move on… But once you move on to the production stage, you will be producing for quite a long time — even up to 40 years,” says Broström.
No real viable alternative to oil
To environmental, social and governance (ESG) enthusiasts and eco-warriors out there, “oil” is a bad word. And Broström is highly aware of it. He also notes that banks are pushing their sustainability values harder, making it difficult for companies like Rex to obtain loans.
But the way he sees it, there is no way that the world can survive entirely on alternative energy now, and at least for the foreseeable future. And it is a good thing that Rex has a group of supportive shareholders, while its war chest remains healthy.
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“We think we will remain an oil company for the foreseeable future, because I think that the demand will still be around for a long time. There is no real viable alternative to oil,” says Broström, adding that today’s airplanes and heavy vehicles can be powered only by oil.
While he recognises why alternatives to fossil fuels are desired, the reality is that the alternatives are not coming as fast as the world hopes. Thus, the reliance on oil will remain strong. Broström notes that if it was not for oil powering the world, our standard of living would not be as it is today.
Nevertheless, Rex has ventured into other greener markets to diversify its business from its core oil E&P. This investment is part of the group’s goal to include sustainable solutions for energy production and materials used in various industries.
Rex’s wholly-owned subsidiary Rex Technology Investments in July last year invested about US$4 million in commercial drone company Xer Technologies. “Xer’s unique heavy-duty drones will promote sustainable practices for corporations and government institutions on a global scale by replacing larger and heavier modes of transport such as helicopters, trucks and sea vessels for a wide range of applications, minimising environmental impact and reducing carbon dioxide emissions,” says Broström.
On top of that, Rex’s 90%-owned subsidiary Lime Petroleum has also participated in a carbon capture and storage project in Norway with Nautilus Carbon Services. Lime Petroleum will be participating in the first phase of a larger project involving several other joint-industry project partners, which aims to secure a storage site in the Norwegian Continental Shelf where carbon dioxide can be injected and safely stored permanently. This project is in line with the global goal to reach net-zero emissions by 2050.
Phase I of the project will include R&D work to outline and describe the methodology and possible locations for a CO2 storage site. Upon completion, a decision will then be made to initiate Phase II, the goal of which is to secure the award of an exploitation licence on the Norwegian Continental Shelf with an application to the authorities.
Apart from its ventures into the ESG space, Broström says: “On our operations, we are doing whatever we can to reduce our carbon footprint. We use the most environmentally friendly equipment there is out there.”
He adds that as a small player in the industry, the group does not have a dedicated ESG team. It instead looks up to the “big guys” for guidance and ideas.
From Catalist to Mainboard
Due to the ESG situation, it is tough for the group to rely on banks for debt funding. While it has so far seen strong support from its investors during funding rounds that were fully subscribed and/or oversubscribed, it has decided in March this year to move to the Mainboard of Singapore Exchange (SGX) from the Catalist Board in a bid to gain more exposure.
Broström says: “When we met the requirements to list on the Mainboard, we decided to move up. It was not because of the money, but we did it mainly for more exposure to institutional investors and researchers.”
Broström adds that Rex is a “cash-strong company” and is currently debt-free (although its subsidiaries may hold some debt). In its latest 1HFY2022 ended June results, the company recorded a 78% drop in earnings to US$6.0 million ($8.6 million), compared to US$27.7 million a year ago. This was despite a 31% y-o-y increase in sales of crude oil to US$99.4 million.
Rex attributed the loss to unforeseen prolonged production stoppage in its Yumna Field in Oman, of which production has resumed. It also conducted several updating works to replace the floating storage tanker and a change-out of the Mobile Offshore Production Unit (MOPU). These new upgrades are meant to maximise oil recovery as the wells tend to naturally deplete over time.
Additionally, Broström explains that the accounting standards for the oil companies are “extremely complicated”, as the bottomline is constantly affected by depreciation in assets. “Our bottom line will always go up and down because of the industry’s complex accounting systems,” says Broström, emphasising that the group’s revenues had shown healthy growth and it is indeed in a good cash position.
On Oct 13, Rex announced that its 91.81% owned subsidiary Masirah Oil (MOL) recorded gross oil production in September from the Yumna Field in offshore Block 50 Oman of an average of 5,747 stock tank barrels per day over the full month of 30 days. MOL is the operator of this oil field and holds a 100% interest in Block 50 Oman.
Elsewhere, the group’s 91.65%-owned subsidiary Lime Petroleum (LPA) recorded 176 barrels of oil equivalent per day in September at the Brage Field in Norway. While the Brage Field was shut down on Sept 2 for scheduled inspections, maintenance and modification activities, all production wells are currently up and running. LPA holds about 33.8% interest in Brage Field. The operator of Brage Field is Wintershall Dea Norge.
Shares in Rex traded at 93 cents in September 2013, slightly a month after it first listed on SGX. Oil prices were at more than US$100 then, before halving over the next two years. As at Oct 12, shares in Rex are trading at 25 cents, about 25.0% lower year-to-date.
The way Broström sees it, the near-term is rather rosy for Rex. “The market is saying that the oil prices now at about US$85 (WTI crude) have crashed, but we were profitable back when the prices were even lower.”
With the profits made from its operations, Rex intends to reinvest the money back into its business. “We made this decision, because we expect the oil prices to be elevated for a long time. This is what’s best for our shareholders — to reinvest the money into our current markets of Oman, Norway and Malaysia,” says Broström.
Rex is also rewarding its shareholders with dividends. It intends to reward at least 2 cents in dividends annually and Broström added that from FY2023 onwards, the group will be paying out a dividend quarterly.
Rex may not be exciting the market the way it wants but has nonetheless received coverarge from a few analysts. UOB Kay Hian in July has kept its “buy” recommendation on Rex albeit with a lower target price of 45 cents from 58 cents previously, due to the group’s decline in production, as a result of current maintenance works. Analyst Llelleythan Tan noted that this decline is temporary and the new upgrades will help the group maximise oil recovery as the wells tend to naturally deplete over time.
As Broström has mentioned that these upgrades have been completed, Rex should see higher production moving forward. The group is also embarking on a drilling campaign this quarter with the aim to increase production and reserves.
In a more recent Oct 7 note, KGI Securities noted that the recent pullback in the US dollar has helped lift prices of commodities in general, given their inverse relationship. KGI added that there is a consensus 12-month target price of 47 cents for Rex.
With the counter’s strong dividend yield of about 7.7%, UOB Kay Hian’s Tan opines that Rex is an attractive pure-play on the ongoing oil supercycle at current price levels.
Photo: Albert Chua/ The Edge Singapore
