RH Petrogas

DMG & Partners Research, Dec 17

RHP announced that current CEO Tony Tan is retiring on Dec 31, but will continue to serve as an adviser to the board. Francis Chang, currently VP exploration & production (E&P), will step into the CEO role. Mr Chang has a strong background in E&P and we expect a smooth transition as he has been with RHP since June 2010.

Maintain "buy" with a S$1.38 target price. The stock trades at 37 per cent discount to its production assets.

For over 35 years, Mr Chang, a geologist by training, has worked in major and independent US-based oil companies such as Amoco, Burlington Resources, Anadarko Petroleum and Texas American Resources. We understand that Mr Chang has been instrumental in planning and executing RHP's drilling programme. We expect RHP to continue executing its strategy of increasing production and investing in low-to-medium risk Asian assets.

We understand that RHP is not considering any share issuance in the near term to fund its upcoming acquisitions. Project financing will be available, as RHP has healthy cash flow and its net cash position offers sufficient debt headroom. We believe that RHP's bite-size is around US$40 million for a production-stage field of a size in between its Basin and Island production sharing contracts' 2P reserves sizes. "2P" denotes proven and probable reserves.

At a 37 per cent discount to its production assets alone, market expectations are low. Our calculation shows that the implied Brent price in the share price is U$70 per barrel. The price also implies a 36 per cent discounted cash flow-value discount rate, which is too pessimistic. RHP's EV/(2P+2C) (enterprise value over proven, probable and contingent reserves) ratio stands at US$4.35 per barrel of oil equivalent (boe) versus U$11.50/boe for KrisEnergy. "2C¨ denotes best estimates of contingent resources.

We believe RHP's fundamental value will become more apparent with greater investor education on valuing E&P companies. Our target price is set at parity to our net present value-and-risking model.

BUY