RH Petrogas looks undervalued relative to its peers

RH Petrogas’ 2Q14 results were healthy with c.4,300boepd of production and EBITDAX of USD8.2m (+43% q-o-q, +6% y-o-y). We believe the Fuyu-1 approval has been delayed by the corruption trials in China, and expect the final stamp after its conclusion. Meanwhile, the stock looks undervalued relative to its peers based on EV/(2P+2C) and considering its 71% oil assets. Add to our top alpha list. Maintain BUY, with a revised SGD1.21 TP (from SGD1.23).

 Steady operational performance. RH Petrogas’ 4,300boepd (barrels of oil equivalent per day) quarterly production was 4.1% higher than FY13’s average of 4,130boepd, with gains from the Basin production sharing contract (PSC) outweighing a natural decline in the Island PSC. EBITDAX (EBITDA excluding exploration expenses) was USD8.2m in 2Q14, up 6% y-o-y, in line with the increase in production.

 No progress on Fuyu-1; takeover talks still ongoing. The Fuyu-1 approval appears to have been delayed by the ongoing corruption trials in China, and we only see the final stamp coming after the dust settles. However, we understand that the takeover talks are still ongoing and we may see a final decision soon.

 Oil is worth far more than gas. PSCs likely to be renewed. RH Petrogas trades at an EV/(2P+2C) of USD5.39/boe. Of its 81.6mmboe (million barrels of oil equivalent) in reserves and resources, 71% are in oil. This compares favourably against peers like KrisEnergy (KRIS SP, NR) whose ratio is 17%. Our discussions with management of other exploration and production companies indicate that Pertamina tends to renew PSCs into co-operation contracts (KSOs) (service agreements) right before the PSC expires – this should allay investor concerns on the 2020 expiry of RH Petrogas’ two PSCs.

 Making a return to our top alpha list. As RH Petrogas’ share price has retraced
21% from its recent high and now offers 61% upside, we add the stock (again) to our top alpha list. Our TP values the company at an EV/(2P+2C) of USD8.74/boe. Potential catalysts include:
i) M&As of brownfield assets,
ii) the upgrade of 2C resources to 2P reserves, and
iii) the approval of Fuyu-1. Key risks include unsuccessful exploration expenses and unexpected maintenance requirements.

Maintain BUY, with a revised SGD1.21 TP (from SGD1.23), after adjusting for quarterly net debt.