The wider energy sector has seen gains in recent years, driven by geopolitical tensions and recovering post-pandemic demand, which have supported prices. However, Singapore-listed oil producer Rex International has experienced a 40% decline in its share price year-to-date, continuing its downward trend over the past five years.
Perception is the problem, with the company being an “unloved and undervalued” stock, says Rex International executive chairman John d’Abo in an interview with The Edge Singapore.
“The reality is that we have a hard time persuading the market how to value an exploration and production [E&P] company, because no one’s looking at risk-NAV and most people tend to focus not on ebitda, but on the bottomline,” adds d’Abo, who joined the company’s board as an independent director in May 2022 before taking up his current role on April 25.
For the 1HFY2024 ended June, Rex International recorded a loss of US$10.45 million ($14.0 million), despite seeing a 48.4% y-o-y improvement in revenue to US$158.67 million from increased production to an average of 10,936 barrels of oil equivalent per day (boepd).
“We actually made a lot, but again, a lot of it’s on paper, right? Because you’ve got to take depletion in oil assets through the profit and loss,” reasons d’Abo, who was previously an investment banker with the likes of Royal Bank of Canada, Credit Suisse, CLSA and HSBC James Capel.
A hefty tax expense of US$49.1 million in the period largely accounted for the difference due to average production in the company’s Brage and Yme offshore fields in Norway increasing 103.0% y-o-y to 9,010 boepd, resulting in increased tax by the Norwegian government.
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“You take all the oil through the top, all the way down to profit before tax, and then the (Norwegian) government comes and takes 78% of it. But they also helped us a lot because they reimburse you 78% of your exploration spend, so you have that help — almost like an investor, giving you the cash back,” says d’Abo.
Having had operations in Norway since 2012, d’Abo says that production coming out of the country will continue to grow, with a discovery in October 2023 of an oil pocket named the Bestla field alongside its normal reserve in the Brage field. This resulted in the Brage field (which now includes Bestla) having 3.41 million barrels of oil equivalent (MMboe) in FY2023, compared to 3.35 MMboe in FY2022.
The company also acquired an additional 15% interest in the Yme field in September for US$15.65 million, taking its total ownership of the field to 25%. “By taking that extra 15% in the Yme field, we’re actually going to add another 6 million barrels of reserves. So if you add that up, we currently have 20 million barrels, but with more to come, we will have 25 million barrels in the ground.”
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“So again, the more reserves you have, the longer you’re going to be able to produce and have revenue, and hopefully that pays out dividends and all the rest,” says d’Abo.
Dealing with an emptying well
In 2020, the company struck gold in Oman — literally. It discovered the Yumna field in an offshore block the size of 17 sq km, which it has held since 2012. “There had been no previous discoveries — I think one well had been drilled, and then there were a few players in there before us, but that hadn’t been a discovery,” says d’Abo.
Although this field has successfully flowed for 4½ years, the levels of reserves are naturally depleting and will eventually be drained until no oil remains. In line with the assessment, production from the Yumna field decreased by 56.1% y-o-y to 2,099 stock tank barrels per day (stbd) in the 1HFY2024, from 4,781 stbd a year ago. Reserves also dropped from 5.01 MMboe in FY2022 to 3.62 MMboe in FY2023.
Notably, Rex International did not record any revenue from the Yumna field in the 1HFY2024, following a multi-well drilling programme to obtain remnant oil deposits.
“Unless we drill and find more oil, we won’t be producing any in a year’s time, and we won’t have any reserves. What we had in Oman at the beginning of the year was 1.8 million barrels, and we’ve shipped 600,000 barrels,” says d’Abo.
To counter this, he says Rex International is looking for a new partner to buy a stake in its search for new reserves within the Oman block.
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He adds: “We are now looking to bring in a new farm-in partner and that process is starting as of today. It’s an ordinary course of business, and so we’re not making a big announcement about it. We’re working with a professional acquisition and disposal boutique in the oil and gas sector called Gneiss [Energy], to find a farm-in partner for Oman to carry us.
“So again, typically when you get a farm-in partner, they’re going to take a percentage of the block, but we are looking for them to carry us to fund a couple of wells.”
If Rex International succeeds in finding a farm-in partner, the company will certainly hope to find another reserve within the Oman block, as the infrastructure required for discovery and drilling are already located in the same waters.
Another reason is the company’s existing familiarity with the Omani government’s approach to the sale of oil. D’Abo says that Rex International signed an exploration production sharing agreement with the Omani government which splits the sale of oil into two components — cost oil and profit oil. “Cost oil is how much you can take off, and profit oil goes to the government. So in Oman, profit oil covers all the taxes, so you don’t see it at the bottom tax expense, because it’s already taken at the topline.”
Understanding where the money flows
Rex International is also eyeing the waters off the West African country of Benin as part of its diversification strategy, having been awarded an offshore licence to operate recently in 2023.
D’Abo says there will not be a need to drill more exploration wells, as the planned asset, the Sèmè field, has an existing reserve, but production stopped way back in 1998.
He continues: “The reality of oil and gas exploration today is that not many people are really doing it. Why? Because there’s a lot of discovered oil out there already. So the only people who are doing expensive offshore drilling are the big major corporations, they’re not going to come and bother looking at these small, marginal fields with 10 million barrels.”
Like Oman, Benin’s coastal waters are shallow, which d’Abo says allows Rex International to apply the same methodology and infrastructure in tapping the Sèmè field. “It’s exactly the same in West Africa, because it’s sitting in about 50 metres of water and it’s even quicker. You don’t have to build a pipeline. You don’t have to take on nearly so much abandonment expenditure, etc.”
The country also has a tax system that the chairman notes is a blend of Norway and Oman’s, with the government taking on the topline and the tax line. “Benin is more beneficial to us than in Oman. So from a tax jurisdiction perspective, the terms are more favourable.”
To date, d’Abo says that the Sèmè field’s development plan will be submitted as soon as possible for the Beninense government’s approval, as aligning the historical data required took six months to do so. Once online, the field will add 10.9 million stock tank barrels (MMstb) to Rex’s reserves.
Although Rex International has a carbon capture licence in which d’Abo notes is a business he is “keen to participate in”, as well as ambitions in the potential operation of commercial drones, the company remains rooted in ensuring a healthy and growing level of reserves.
“In summary, in the beginning of 2023, we had around 8 million barrels of oil. We have now added 6 million barrels by buying a further 15% in Yme, we’ve added 6 million barrels from Benin and that number will go up. We’ve also added 4 million barrels of resources in the Bestla field, which, as soon as the development plans are approved, will move into reserves,” says d’Abo.
“In the space of a year, we have gone from 8 million barrels to 24 to 25 million barrels of reserves. Furthermore, even without accounting for Oman, with Norway and Benin, we will be pretty close to 20,000 barrels of production a day in a year’s time. This gives me a lot more comfort as the chairman, that we are going to be around for longer.”
