UOB Kay Hian analyst Adrian Loh is maintaining his “buy'' call on RH Petrogas T13 with a raised target price of 24.2 cents from 23.8 cents previously, citing the group’s successful yielding of one well for its 2023/2024 drilling programme. The result is “in-line” with historical global exploration success rates, notes Loh.
In mid-March this year, the group announced that its Piarawi-1 well, located in its Salawati Production Sharing Contract (PSC) and the fourth and final well of its 2023/2024 drilling programme, found good-quality oil within a tight carbonate reservoir.
Currently, the well is pending approval for testing and fracking by Indonesian oil and gas regulators, with a possibility to begin production as soon as the 4QFY2024 ending Dec 31.
Loh writes: “RH Petrogas estimates around two million barrels (mmbbl) in recoverable reserves at Piarawi which is in line with our pre-drill estimate and potential production rates of 300 to 500 barrels per day (bpd), 6% more from 2023 levels. We highlight that global exploration success rates range at 10% to 20% thus we deem RH Petrogas' exploration programme as being an in-line result.”
Meanwhile, RH Petrogas’s FY2023 results beat the analyst’s expectations.
Excluding the nearly US$18 million ($24.2 million) in exploration write-offs from the drilling of its three non-commercial wells in 2HFY2023, the group would have registered a net profit of US$13.8 million, thus beating Loh’s US$11 million profit estimate for the year.
Without the write-offs, net profit for the year came in at US$3.2 million.
“We highlight that RH Petrogas's operations continue to perform well with FY2023 production rising by 3.5% y-o-y to 4,990 bpd or 1.44 mmbbl while production costs were largely in line with our estimates at over US$37 per barrel.”
Moving forward, RH Petrogas has planned for a two-well drilling programme in 2HFY2024 at the Basin PSC oilfield in Indonesia, of which the group has a 70% stake.
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One well will target a shallow reservoir with potential unrisked recoverable reserves of eight to 10 mmbbl at a cost of US$4 million, and the second one will target a deeper reservoir of eight to 10 billion cubic feet (bcf) of gas at a cost of US$8 million to US$10 million.
On this, Loh writes: “It is important to note that Pertamina drilled two successful oil and gas wells that were only two kilometres to four kilometres away near RH Petrogas's first planned shallow well and thus it would appear that the likelihood of a positive result is high in our view.”
Meanwhile, although the group’s Karuka exploration well failed to find any commercial gas to supply the nearby nickel smelting plant, Loh notes that it appears RH Petrogas has enough contingent gas resources nearby to supply the plant with minimal capex outlay.
He adds: “While negotiations with the smelting plant should commence in the near term with production rates and gas prices yet to be determined, we believe that any positive outcome should bode well for RH Petrogas's medium-to long-term production outlook.”
As such, the UOB Kay Hian analyst has raised his earnings estimates for FY2024 to FY2025 by 22% to 23% due to higher oil price estimates as well as slightly higher oil production forecasts.
“We highlight that the company had zero debt at the end of FY2023 and US$54.6 million in cash which equates to over half of its current market capitalisation,” writes Loh.
He continues: “Based on our forecasts, RH Petrogas trades at very inexpensive multiples with its 2024 price-to-earnings ratio (PE) and enterprise value (EV)/ earnings before interest, taxes, depreciation and amortisation (ebitda) of 6.2 times and 4.4 times respectively at 23% to 36% discounts to its regional oil and gas peers.”
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Although Loh understands that the group’s inexpensive valuation might be due to its small market capitalisation and low daily trading liquidity, he also points out that its management has “a good track record” of delivering on production growth and cost control.
Presently, the analyst prefers RH Petrogas to fellow oil producer Rex International, due to its better oil and gas production management, better quality assets, lack of corporate governance issues, inexpensive valuation and most importantly, exploration upside.
“In our view, the next few months may see RH Petrogas's share price trading in line with oil price movements until at least 2HFY2024 when its drilling programme commences,” concludes Loh.
Share price catalysts noted by him include the successful drilling results of the group’s two wells in 2HFY2023, which could add to its valuation in the near-term, and profits and cash flow in the medium to long term. Conversely, risks include fluctuating oil prices which could negatively impact profits and cash flow in the event of a prolonged downturn, as well as operational risk, regulatory risk and sovereign risk, among others.
As at 12.00 pm, shares in RH Petrogas are trading at 0.4 cents higher or 2.47% up at 17 cents.
