RH Petrogas - UOB Kay Hian 2021-07-27: A Strong 1Q21 Paves Way For A Record Year, Backed By Favourable Oil Prices

RH PETROGAS LIMITED (SGX:T13)

RH Petrogas - A Strong 1Q21 Paves Way For A Record Year, Backed By Favourable Oil Prices

RH PetroGas (RHP, SGX:T13)'s 1Q21 earnings of US$3.4m (+466% y-o-y) appear sustainable, driven by:
1. a strong recovery in oil prices;
2. reduced production cost since mid-20; and
3. renewal of 20-year Product Sharing Contracts (PSCs) for oilfields in Indonesia, which raised RHP’s effective stake from 54% to 58%.
RHP’s 20-year DCF valuation ranges from $0.29 to $0.40, assuming oil price of US$65-75 per barrel. RHP trades at 7x 2021F P/E, annualising 1Q21 EPS. In 2Q21, Brent oil price continued to rally 13% q-o-q.

Despite volatility in oil prices, RH PetroGas (RHP) remained profitable in the past three out of four years (except in 2020 due to COVID-19), with a portfolio consisting of two upstream assets located in Indonesia. These were awarded through Product Sharing Contracts (PSCs) with Indonesia’s national oil company, Pertamina.
RHP’s assets include Kepala Burung (Basin PSC) and Salawati Kepala Burung (Island PSC) which have relatively stable net production of 4,000 barrels of oil equivalent per day (BOEPD) since 2016. In Jul 18, both assets were granted 20-year extensions from the original expiry in 2020. In addition, RHP’s effective working interest has increased from 54% to 58% and it has become the sole operator for both PSCs.

In 1Q21, RHP reported record earnings of US$3.4m (+466% y-o-y). See RHP's announcements. This earnings trajectory appears sustainable as the strong 1Q21 was driven by:
1. a strong Indonesia which raises RHP’s effective working interest.
RHP’s future earnings strength will largely depend on the future Brent oil price but the lowered production cost should minimise downside risk.

Based on an independent qualified person report (QPR), the aggregate 2P reserves as of 1 January 2021 increased 22% y-o-y due to:
1. reserve upgrades based on latest production performance,
2. updates to the field development plan with an increased number of workover and well service jobs planned as RHP became the operator of the two new PSCs, and
3. the reclassification of a portion of the Contingent Resource volumes due to reduced production cost and improved economics of the Island PSC.

RHP’s balance sheet appears weak due to a strong free cash flow of US$7m, is almost sufficient to offset its total borrowings of US$27m.

20-year DCF provides a valuation of S$0.29-0.40 per RHP share, based on the following assumptions:
1. production output of 4,300 BOEPD,
2. oil price assumption of US$65- 75/barrel,
3. cost of production of US$35/barrel,
4. capex of US$3.5m per year, and
5. discount rate of 10%.
RHP's share price trades at 7x 2021F P/E, annualising 1Q21 EPS of US$0.0046/share (S$0.0062/share).
See
Rally in oil price in 2Q21 provides further room for upside surprise in earnings. We note that the Brent oil price has continued to increase by 13% q-o-q in 2Q21, up from US$61/barrel in 1Q21 to US$69/barrel in 2Q21. This implies that there is further room for upside surprise in 2Q21 earnings.

The largest shareholder of RHP is Tan Sri Datuk Sir Tiong Hiew King (Tan Sri Tiong), who has a deemed interest of 64% ownership. Tan Sri Tiong is ranked the 16th richest man in Malaysia, based on 2021 Forbes list published in Feb 2021. He is a businessman with vast and extensive experience in various business sectors including media and publishing, oil and gas, mining, fishery, manufacturing, information technology, timber, tree plantation, oil palm plantation and mills. Over the years, Tan Sri Tiong has started and built up the Rimbunan Hijau Group of Companies (RH Group). His company holds forestry concessions in 16 countries.
Currently, Tan Sri Tiong is the Executive Chairman and Managing Director of RH Group, a large diversified conglomerate which has interests in various businesses in Malaysia comprising of timber harvesting, processing and manufacturing of timber products, plantations and other businesses around the world. He is also the founder of an English newspaper named The National in Papua New Guinea. He is currently the President of The Chinese Language Press Institute Limited. He is also the Chairman of the Board of of Yayasan Sin Chew.

Singapore Research Team UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-07-27

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