Rex International - UOB Kay Hian 2020-03-05: Impending First Oil Production, Huge Cash War Chest About To Get Bigger

REX INTERNATIONAL HOLDING LTD (SGX:5WH)

Rex International - Impending First Oil Production, Huge Cash War Chest About To Get Bigger

Rex International reported net profit of US$19.4m for 2019, backed by the sale of one of its Norwegian assets. We expect Rex International to divest of its stake in the Shrek prospect by 2020.
Rex International also increased its healthy net cash position to US$61.9m in 2019 (2018: US$27.8m). With the successful test production in Oman, we expect Rex International to have recurrent revenue from the oil production at the Yumna 1 well.

Maintain BUY with a higher SOTP-based target price of S$0.27, implying an upside of 46.7% from current price levels.

Rex International (SGX:5WH) reported net profit of US$19.4m in 2019 (2018: US$1.1m), largely due to the sale of Norwegian assets, recording a strong other operating income of US$36.6m (2018: US$28.8m).
For 2020, we expect Rex International to divest its stake in the Shrek prospect, recognising about US$26.2m gains, according to our estimates. Furthermore, Rex International was recently awarded new stakes in Norwegian licences PL1061 and PL1062. If these were discovered to contain oil, sale of these assets would unlock huge value for Rex International.

Rex International has increased its net cash position to US$61.9m (2018: US$34.1m), forming 36% of its market cap. With a healthy net cash position, we reckon Rex International has the capacity to increase exploration activities in Block 50 Oman.

With the successful test trial production in Yumna 1 well, Rex International reported a test production rate of 11,843 stock tank barrels of oil per day (bpd), slightly above our expectations of 10,000bpd. Rex International is now doing extended early production testing, eventually leading to a declaration of commerciality (DOC) which is subject to approval by the Omani government. The DOC is awarded when Rex International is shown to have stable oil production. Once awarded, Rex International is able to offset 65% of its recoverable cost pool. With roughly US$100m in its cost pool, Rex International would likely receive around US$65m of the US$100m with oil revenue, implying an additional estimated US$26.7m in free cash flow.
Also, the Omani government has the option to farm-in 25% of the Omani operations. Taking a conservative approach, we have assumed Rex International would receive 25% of the cost recovery pool of the Omani assets in cash, estimated at US$25m. As Yumna 1 is only the first well, we expect the fair value of the Omani assets to be much higher when more discovery wells are found in Block 50. Therefore, coupled with the US$26.7m in cash from the obtainment of the DOC, Rex International’s net cash position would increase by US$51.0m to US$115m, greatly increasing its NAV/share.

With oil prices fluctuating, we have adjusted our revenue and net profit forecasts for 2020-22, as well as our bbl/day assumptions slightly. We opine that Rex International would start first oil production in 2Q20 and divest its stake in the Shrek prospect in 2020.
As oil prices have moderated from about US$65/bbl at our last report in Nov 19 to less than US$50/bbl currently, we adjust our oil price assumptions to US$50-54/bbl for FY20-22. Revenues for FY20-22 are forecasted at US$97.9m (from US$144.3m), US$74.0m (US$87.2m) and US$54.3m respectively while net profits are forecasted at US$36.3m (from US$52.0m), US$7.6m (US$13.0m) and US$1.8m respectively.

Maintain BUY with a higher SOTP-based target price of S$0.27, based on 1.0x 2019 NAV, cash from the DOC and the Omani government and revaluation of both the Oman and Norwegian assets. Rex International is trading at 1.0x 2020F P/B, a little over peers’ average P/B mean of 0.9x. We reckon this is justified, based on its strong net cash position compared to peers as well as its undervalued assets.
With oil prices depressed, we believe Rex International would be an attractive play when oil prices start to rebound. We believe oil production in Block 50 Oman, cash from the DOC, sale of the Norwegian discovery assets and the discovery of new oil reservoirs in Block 50 Oman would help boost Rex International’s NAV further.
See Rex International Share Price; Rex International Target Price; Rex International Analyst Reports; Rex International Dividend History; Rex International Announcements; Rex International Latest News.

Stronger-than-expected oil production volume from Oman, and a surge in crude oil prices.
Discovery of good oil reservoirs in the Norwegian concessions.

Llelleythan Tan UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-03-05

SGX Stock Analyst Report BUY MAINTAIN BUY 0.270 UP 0.218