RH Petrogas

UOBKayhian on 7 June 2012

What’s New
· Proposes debt conversion. On 22 May, RH Petrogas (RHP) announced that the group has entered into a debt conversion deed with Sharptone Investments Limited, Surreyville Pte Ltd and RH Capital Limited, which are entities held by RHP chairman Tan Sri Datuk Sir Tiong Hiew King. RHP will issue an aggregate of 157.5m new shares as full and final settlement of an aggregate sum of US$61.5m of debt outstanding at the conversion price of S$0.492. RHP’s trading range in May was between S$0.425 and S$0.520.
· Aims to raise S$132m. RHP has also proposed the allotment and issue of up to 262.3m new shares with up to 87.4m warrants at such price to be determined by the board of RHP at its discretion which shall not be less than S$0.36 per share. Through this fund-raising exercise, RHP aims to raise about S$132m.
· Opportunities to grow asset portfolio. In our view, RHP is likely to deploy the capital to increase production capacity under the group’s existing production sharing agreements in Indonesia and China, as well as to acquire new oil and gas concessions.

Stock Impact
· Improved balance sheet strength. After the proposed equity fund raising, RHP will have a net cash of 59.1% from a net gearing of 35.5%.
· Approvals expected by end-12. RHP has submitted a revised Overall Development Plan (ODP) for the Fuyu-1 Block (Yongping Field) in China. The ODP is expected to be approved by 3Q12 which will allow the group to start production in 2H12.
· Production growth. RHP produced 4,600 boed in 2011, and targets to grow production by 900 boed in 2012. The group is targeting capex of US$29m in 2012 to develop 5 exploration wells, 18 development wells, 2 appraisal wells and 16 well pilot tests.

Valuation
· EV/2P ratio higher than peers’. We use an enterprise value to 2P (proven and probable) reserve (EV/2P) ratio to assess the value of RHP, in comparison to London-listed exploration and production companies. We note that RHP’s EV/2P ratio of US$17.0m/mmboe is higher than most of its peers. However the 2P number does not include potential oil reserves from the Fuyu-1 Block.