May have overreacted on the oil market rout - RHP

RHP has fallen 63% in the 6-month period while Brent crude fell c.44%. Maintain BUY with a lower SGD0.50 TP (from SGD1.19, 47.1% upside) as we factor in lower long-term oil price assumptions. It has received final approval for the Fuyu-1 field, upgrading 2P reserves to c.17.4mmboe and we are satisfied that it has the financial capability to develop this field. The stock has likely overreacted on the oil market rout.

- 2P reserves upgraded by 7.1m barrels of oil equivalent (mmboe), c.17.41mmboe post-adjustments. With the overall development plan’s approval for the Fuyu-1 block, RH Petrogas (RHP) upgraded 7.1mmboe to proven and probable (2P) reserves. It now trades at EV/2P of USD11.79/barrels (bbls) of oil equivalent (boe) (adjusting 2P down by its estimated production in FY14). EV/[2P+2C (the best estimate of contingent resources)] is USD2.57/boe, priced for takeover.

- Fuyu-1 development only requires USD2m/USD10m in FY14/FY15F. We understand that the development of the Fuyu-1 will only require USD2m/USD10m in FY14/FY15F, which can easily be covered by existing cash balances, operating cash flow or bank borrowings. Net gearing was only 3.1% as of 3Q14, leaving plenty of debt headroom. Management is confident that bank financing for field development is readily available, meaning RHP does not need to tap equity markets.

- Casualty of Saudi-Shale showdown. The low crude price today is a result of Saudi Arabia’s desire to maintain its market share as it faces down shale producers in the US. We believe that either way, one of the parties will cut production eventually, thereby moving the market back towards supply-demand equilibrium. The current Brent crude price is making deepwater investments uneconomical, which is unsustainable in the long run as global oil demand is still growing at a steady pace.

- Oil companies should be valued on long-term oil prices. We apologise for being unable to publish updates on this stock in the last four months due to factors beyond our control. RHP is now priced as if oil prices were USD55/bbl (See Figure 2). We value it at a long-term oilprice assumption of USD80/bbl, down from USD100/bbl.

The resultant TP is SGD0.50 (from SGD1.19), which may understate the true potential of the Fuyu-1 field with an implicit value of only USD26m for the 34mmboe field. Having suffered one of the largest falls in the sector from the oil price collapse, it should deliver the strongest outperformance in an oil-price recovery scenario.