Excerpts from UOB Kay Hian report

Analyst: Llelleythan Tan

4Q19: Impending First Oil Production, Huge Cash War Chest About To Get Bigger
Rex reported net profit of US$19.4m for 2019, backed by the sale of one of its Norwegian assets.

Rex 

Share price: 
19 c

Target: 
27 c

We expect Rex to divest of its stake in the Shrek prospect by 2020.

Rex 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 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.


WHAT’S NEW
• Strong 2019 earnings due to sale of Norwegian assets. Rex International Holding (Rex) 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 to divest its stake in the Shrek prospect, recognising about US$26.2m gains, according to our estimates.

Llelleythan Tan"Furthermore, Rex was recently awarded new stakes in Norwegian licences PL1061 and PL1062. If these prove to be oil discoveries, sale of these assets could unlock material value for Rex.

-- Llelleythan Tan (photo), 
UOB KH analyst

Robust cash war chest. Rex 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 has the capacity to increase exploration activities in Block 50 Oman.


Promising test production results followed by obtainment of DOC. With the successful test trial production in Yumna 1 well, Rex reported a test production rate of 11,843 stock tank barrels of oil per day (bpd), slightly above our expectations of 10,000bpd.

Rex 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 is shown to have stable oil production.

Once awarded, Rex is able to offset 65% of its recoverable cost pool.

With roughly US$100m in its cost pool, Rex would likely receive around US$65m of the US$100m with oil revenue, implying an additional estimated US$26.7m in free cash flow.

BULL PAPUABull Papua, an oil tanker, will store up to 750,000 barrels of oil produced during the early appraisal phase at the Oman oilfield.
Photo: marinetraffic.com


• Also, the Omani government has the option to farm-in 25% of the Omani operations.

Taking a conservative approach, we have assumed Rex 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’s net cash position would increase by US$51.0m to US$115m, greatly increasing its NAV/share.


EARNINGS REVISION/RISK
We adjusted down our revenue and net profit estimates for 2020-21, and introduce 2022 forecasts.

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 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. 

VALUATION/RECOMMENDATION

Maintain BUY with target price of S$0.27

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 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 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’s NAV further.


SHARE PRICE CATALYST
• Stronger-than-expected oil production volume from Oman, and a surge in crude oil prices. 

• Discovery of good oil reservoirs in the Norwegian concessions.


Full report here


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