Excerpts from UOB KH report
Analysts: Llelleythan Tan & Adrian Loh
Yumna Oil Field Remains Problematic
|Twelve months after new oil production facilities were installed at the Yumna oil field offshore Oman (which is Rex’s major cash cow), production has yet to regain the highs seen in 2021.
As a result, even with the inclusion of the oil production assets at Brage and Yme, Rex’s total production remains 31% below the levels seen two years ago.
Maintain SELL. Target price: S$0.10.
• Disappointing production at its key asset. One year after the successful hook-up and commissioning of the new floating storage tanker and mobile offshore production unit (MOPU) at its key Yumna asset offshore Oman, production has continued to disappoint. Prior to the upgrades, Rex International Holding (Rex) had guided for the new facility to double its liquids processing capacity to 30,000bpd.
• As at end-22, Rex had a net cash position of S$0.024 per share which represents around 15% of the company’s current share price.
However, ever since Jun 22, production has remained at around 4,300bpd of oil vs production of 7,500-10,600bpd in the six months prior to the change-out of the MOPU. Over the past two years, Yumna’s production has declined by >60% (see chart overleaf), with the latest May 23 data showing a 10% mom decline.
• Could excessive water production be a problem? Rex had specified “liquids” processing capacity for its new facilities instead of oil, thus potentially indicating that Yumna’s wells may be producing excessive amounts of water together with the oil. High water production is generally an indicator of a damaged reservoir, or one that is undergoing faster-than-expected depletion.
Given numerous historical problems with production at Yumna (see table overleaf), we believe that there may be significant operational challenges for Rex to achieve and maintain oil production in excess of 10,000bpd, despite its claims that Yumna wells produced 20,000bpd of oil in Mar 21.
• Third interested-party transaction (IPT) in five months. In early-2Q23, Rex announced that it will provide US$17.6m worth of security to its 20%-owned Crescent Marine Holding Ltd (CMH) to allow for debt financing from a third party.
CMH intends to purchase a second vessel that will be deployed for Rex’s oil exploration and production activities, with the company stating that this will be more economically beneficial to its projects.
The other two IPTs (announced in Dec 22) related to drone and medical technology were supposedly undertaken to diversify away from oil and gas. However this latest IPT is oil and gas related, which could cause some confusion in the market regarding Rex’s strategy. The company has declined to provide the market with any details of the vessel at present.
|• A bright spot at Brage. In the same production update, production at Brage rose by nearly 1.5x due to the commencement of a new production well.
However, production here could have been higher if not for limited gas processing facilities on the platform.
Rex also disclosed that Brage’s production could increase again in Sep 23 as it has plans to bring on another production well.
• For exposure to upstream oil & gas in Singapore, we prefer RH Petrogas (BUY/Target: S$0.255). Compared to Rex, RH Petrogas is more focused oil play as it has exposure only to onshore Indonesia, does not undertake IPTs, and more importantly has been able to demonstrate a higher level of operational excellence, having increased production at its two mature onshore oil fields in the past five years.
• No changes to core earnings forecasts. We have adjusted our EBITDA calculations to take into account Rex’s annual depletion of oil and gas properties as well as impairment losses on exploration and evaluation assets.
• We retain our SELL rating with a target price of S$0.10. While upstream oil & gas companies are traditionally valued using a discounted cash flow methodology, we have elected to use a target 0.5x P/B multiple instead due to our diminished confidence in the company’s ability to execute on its oil production targets.
In addition, we believe that its interested party transactions has raised corporate governance issues which we believe detracts from the company’s oil assets which could – if managed properly – generate decent cash flow.
• Some positives. As at end-22, Rex had a net cash position of S$0.024 per share which represents around 15% of the company’s current share price. In addition, the company currently trades on an EV/boe of US$16.70 per barrel, which appears attractive relative to current oil prices.
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• Refraining from related-party transactions in sectors that are unrelated to oil and gas
• Better consistency and reliability in delivering oil production numbers.
Full report here.