Share Price S$0.93
Target Price S$1.47
BUY Initiation For 58% Upside
We initiate coverage on Rex with a BUY and target price of S$1.47. Rex’s most valuable asset is its access to the proprietary Rex Technologies that may significantly improve the odds of a successful oil exploration. A successful oil discovery may see a re-rating of the stock. Results of the first exploration well are expected to be known by 1Q14.
• BUY Initiation with a target price of S$1.47. This is based on expected monetary value (EMV) of Rex’s exploration assets using forecasts from traditional geologist findings. Please refer to our initiation note (Money Talk dated 4 Oct 13) for more details.
• Breakthrough technology significantly improves odds of oil exploration success. Using proprietary satellite and seismic imaging technologies, management believes Rex Technologies can produce an exploration success rate in excess of 50%, compared with a global average of 10-15%. In addition, Rex Technologies also cuts the exploration process to 18-60 months from the 72-114 months required under conventional technologies.
• High accuracy in testing to back up claims. Rex has conducted blind tests for Hibiscus and Fram, which show an impressive 100% accuracy. Over the past two years, Rex had analysed 59 prospects for North energy, accurately predicting 35 of the 41 wells that had been drilled (85% accuracy). Rex successfully predicted 24 out of 25 dry wells and 11 out of 16 commercial oil wells.
• Secure concessions on better terms. As Rex Technologies gains traction among market players, Rex has been able to secure concessions on better terms, such as eliminating common industry practices of paying entrance fees. With its leverage, Rex has successfully farmed into 15 concessions. ASX-listed Bass Strait Oil Company (BAS) is Rex’s newest strategic partner in reassessing specific exploration opportunities in Gippsland Basin of Australia.
• A potential multi-bagger. We estimate that Rex has an exploration target of 2,183mmbbl unrisked resources (EMV range: US$1.31- 5.39/share). Key assets include Oman Block 50, Rak Offshore and Sharjah Central, which form almost 90% of our total risked NAV, and are estimated to have a risked value attributable to Rex of US$1,319m (US$1.31/share) based on conventional chances of success. Assuming Rex Technologies is proven to achieve a success rate of 50% as claimed; Rex’s total risked NAV may increase significantly by more than 4x (assuming unrisked resources based on traditional geologist findings are correct and unchanged).
• Profitable in 2014 and 2015. We expect Rex to register a net profit of US$7.5m and US$75.4m in 2014 and 2015 respectively, driven by licence farm-outs upon hydrocarbon discoveries.
• Key risks. In our view, the key risks facing the group include: a) execution risk, b) asset concentration risk, and c) dependence on Rex Technologies,
• Initiate with a BUY and target price of S$1.47, based on EMV of Rex’s exploration assets using forecasts from traditional geologist findings. Our base-case valuation of Rex is based on average rates of exploration success derived from conventional methods of analysis. We have not imputed improved success rates with the use of Rex Technologies. As a result, there may be more upside to our target valuation if Rex Technologies proves to be successful.
Publish date: 04/10/13