Tuesday, 26 August 2014

RH Petrogas

ON Aug 4, 2014, Fosun International Ltd made an A$474 million (S$551 million) all-cash offer for Roc Oil, which was accepted by management. Roc Oil's asset portfolio includes producing areas in China, Australia and Malaysia, with 2P (proven and probable) reserves of 17.4 million barrels of oil equivalent (mmboe) and 2C (best-estimate contingent) contingent resources of 33.7 mmboe. The oil/gas split is approximately 92 per cent/8 per cent. Stripping out net cash of US$67.2 million, the acquisition EV/(2P + 2C) (enterprise value to the sum of 2P and 2C) multiple is circa US$7.315/barrel of oil equivalent (boe).
RH Petrogas' 81.6 mmboe of assets are also heavily weighted towards oil, with a 71 per cent/29 per cent oil/gas split. The market currently only values these assets at en EV/(2P + 2C) of US$5.84/boe. We note that 47.5 mmboe of RH Petrogas' assets relate to its two production sharing contracts in Indonesia which will expire in 2020. We expect 30-year extensions into service agreements (KSOs) before the expiry, which will then allow the company to recognise more reserves and resources. Our TP values RH Petrogas at US$8.54/boe.
RH Petrogas also appears undervalued relative to its SGX-listed peers, based on an EV-to-undiscounted-working-interest-value measure of 7.0 per cent, compared with 10.2 per cent for Kris Energy and 21.0 per cent for Rex International.
The corruption trials in China appear to have held up the approval of the Fuyu-1 Overall Development Plan. We factor in a six-month delay by lowering our risking percentage by 5 percentage points to 95 per cent, resulting in a marginal adjustment of our TP to S$1.19 (from S$1.21). Maintain "buy". We continue to see the eventual approval of Fuyu-1 plan, potential M&As, as well as increasing production from its new development wells as near-term catalysts.

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