RH PetroGas

DMG & Partners Research, Oct 1

THE stock of Singapore-based O&G exploration & production (E&P) firm RH PetroGas (RHP) is deeply undervalued - at 37 per cent and 55 per cent discounts to its producing and development assets and our risked NPV respectively, with potential upside from: i) proving of its resources, ii) M&A, iii) contracts extension, iv) entry into Myanmar, and v) higher oil prices. RHP is now priced at takeover levels.

RHP should trade at S$1.05 on today's assets. An alternative valuation is via sum of parts of its 2P (both proven and probable) reserves and 2C resources (best estimates of contingent resources). For RHP, we value these at S$1.05 per share, assigning zero value to its exploration assets. This implies EV/(2P+2C) of US$7.1/barrel of oil equivalent (boe), less than the global average of US$7.9/boe.

RHP and KrisEnergy (not rated) have 73 million barrels of oil equivalent (mmboe) and 76mmboe respectively of combined 2P reserves + 2C resources. The enterprise value (EV) of the two should converge even though KrisEnergy's current EV/(2P+2C) is 2.6 times that of RHP. As the key valuation metric for an E&P company is the NPV of its oilfields, an acceptable alternative is a valuation of its 2P reserves and 2C resources. Thus PE, P/B and ROE measures tend to underestimate the true value of an E&P company.

Drilling results will be key catalysts. The movement of prospective resources to 2C resources, then to 2P reserves, will drive valuations. A takeover bid may also present a sharp revaluation catalyst.

RHP recently walked away from a farm-in option for an oilfield in Myanmar. Clearly, it has connections and potential opportunities in this country. We believe that future Burmese oilfield production sharing contracts could materialise and provide further upside to our estimates.

RHP is an under-researched E&P play. Initiate with "buy", S$1.47 target price (TP). Our TP is based on parity to our NPV- and-risking model. Adjusted for a potential 20 per cent new share placement to raise US$60 million, RHP would still be worth S$1.32 per share.

BUY