Rex International - KGI Securities 2021-08-18: Bulking Its War Chest


Rex International - Bulking Its War Chest

  • Good start; even better second half. Rex International reported its highest semi-annual revenue since listing in 2013. Rex International’s 1H2021 PATMI of US$24.0mil is a significant reversal from the US$20.1mil loss in 1H2020, driven by higher production and oil prices. We expect better performance ahead as the group grows organically and through acquisitions.
  • Record free cash flows. Free cash flow generated by oil and gas companies are expected to break records this year with oil currently close to US$70 per barrel. For Rex International, the windfall will continue to strengthen its already strong balance sheet and give it opportunities to diversify.
  • We maintain an Outperform recommendation for Rex International while raising our DCF-backed target price to S$0.33, factoring in higher production from Oman.

Good first half.

  • Rex International (SGX:5WH) reported a 1H2021 PATMI of US$23.9mil, making up 21% of our updated full-year forecast of US$115.3mil. This is line with our expectations as Rex International will benefit from the full effect of higher oil prices and contribution from Brage in the second half of 2021.
  • Net cash (Cash + quoted investments - debt) strengthened to US$21.3mil as at end June 2021. Rex International generated positive operating cash flows of US$17.8mil and spent US$22.0mil on E&P capex. Its net cash should be at least US$42mil higher (net to Rex International as per our estimates) given that it only received the sale of oil from three liftings in July and August 2021.

Even better going forward.

  • The acquisition of the 33.84% interest in the oil producing Brage Field in Norway will be effective from 1 January 2021, after approval from the Norwegian authorities. Brage Field will add around 3.4k barrels of oil production per day net to Rex International’s subsidiary, Lime Petroleum. We estimate this will translate to around US$20mil free cash flow net to Rex International in 2021. The acquisition will be funded by the US$60mil senior secured bond that was fully subscribed back in June 2021.
  • For the year ahead, based on US$65 oil price, we forecast Rex International’s net cash position to surge to US$107mil by FY2022F. This is equivalent to S$144mil or 58% of Rex International’s current market capitalisation (based on share price of S$0.192).

We are bullish on oil prices.

  • Rex International’s average realised oil price was US$62 per barrel in 1H2021, an increase from US$23 per barrel in 1H2020. Brent oil prices have remained resilient above US$68 per barrel since May, despite concerns over the rising COVID cases in China. While China has recently reduced oil imports, it is at the expense of drawing down its onshore storage levels. Hence, China will eventually have to begin increasing oil imports later this year. Furthermore, global crude inventories continue to decline.
  • Overall, we should see a positive tailwind to oil prices driven by China’s resumption of oil imports going into the fourth quarter, as well as an accelerating economic recovery in 2022.

Neglected sector…but where opportunities abound.

  • Rystad Energy, an energy consultancy firm, projects that with oil trading around US$70 per barrel, the world’s publicly traded exploration and production (E&P) companies are set to generate record-breaking free cash flows in 2021. Their combined free cash flows is expected to surge to US$348bn in 2021, from a previous high of US$311bn back in 2008, as per Rystad’s estimates.

Rex International - Valuation & Action:

Joel Ng KGI Securities Research | Chen Guangzhi KGI Securities | https://www.kgieworld.sg/ 2021-08-18