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.

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

RH Petrogas aims to raise S$132m

What’s New

• Proposes debt conversion. On 22 May, RH Petrogas (RHP) announced that the group has entered into a debt conversion deed with Sharptone Investments Limited, Surreyville Pte Ltd and RH Capital Limited, which are entities held by RHP chairman Tan Sri Datuk Sir Tiong Hiew King. RHP will issue an aggregate of 157.5m new shares as full and final settlement of an aggregate sum of US$61.5m of debt outstanding at the conversion price of S$0.492. RHP’s trading range in May was between S$0.425 and S$0.520.

• Aims to raise S$132m. RHP has also proposed the allotment and issue of up to 262.3m new shares with up to 87.4m warrants at such price to be determined by the board of RHP at its discretion which shall not be less than S$0.36 per share. Through this fund-raising exercise, RHP aims to raise about S$132m.

• Opportunities to grow asset portfolio. In our view, RHP is likely to