UOB Kay Hian is reiterating its “sell” recommendation on Rex International Holding 5WH with a target price of 10 cents.
While upstream oil & gas companies are traditionally valued using a discounted cash flow methodology, analysts Llelleythan Tan and Adrian Loh have elected to use a target 0.5x P/B multiple instead due to their 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,” say Tan and Loh.
Twelve months 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 (which is Rex’s major cash cow), production has continued to disappoint and has yet to regain the highs seen in 2021, according to the analysts in their June 14 report.
Instead, production remains stubbornly at 50% below change-out of the new facilities. Prior to the upgrades, Rex International Holding (Rex) had guided for the new facility to double its liquids processing capacity to 30,000 barrel per day (bpd).
However, ever since June 2022, production has remained at around 4,300 bpd of oil, compared to a production of 7,500-10,600 bpd in the six months prior to the change-out of the MOPU. Over the past two years, Yumna’s production has declined by about 60%, with the latest May data showing a 10% m-o-m decline.
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.
Brage on the other hand is a bright spot for the group, as production rose by nearly 1.5x due to the commencement of a new production well. But 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 September, as it has plants to bring on another production well.
The analysts are however taking into account that excessive water production could be a potential issue for the group at its Yumna wells.
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“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,” say Tan and Loh.
Given numerous historical problems with production at Yumna, they believe that there may be significant operational challenges for Rex to achieve and maintain oil production in excess of 10,000 bpd, despite its claims that Yumna wells produced 20,000 bpd of oil in Mar 2021.
Meanwhile, there has been some third interested-party transaction (IPT) in the past five months.
In early-2Q2023, Rex announced that it will provide US$17.6 million ($26.7 million) worth of security to its 20%-owned Crescent Marine Holding (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 December 2022) 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.
For exposure to upstream oil & gas in Singapore, the analysts prefer RH Petrogas T13 , which they believe is a 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. They have a “buy” call on RH Petrogas with a 25.5 cents target price.
As at 10.30am, shares in Rex International are trading at 17 cents.
