Rex International Holdings: Banking on exclusive exploration technology to help detect oil wells
Written by Adele Teo
Monday, 21 October 2013 15:50
Rex International Holdings has been one of the more successful IPOs in the past year and the stock looks like it could still go higher. The company started trading on Catalist on July 31, opening at 50.5 cents — just slightly above its IPO price of 50 cents — and closing at 56.5 cents the same day. More than 165 million shares changed hands. The Swedish oil and gas group had successfully placed out 168 million shares at its IPO to institutional investors, including an over-allotment of 28 million shares. Its public offer of 2.5 million shares was 153 times subscribed.
Rex International’s parent company, Rex Partners, owns a set of proprietary and innovative exploration technologies called Rex Technologies, which helps mitigate exploration risks and reduces the costs of exploration. Rex Technologies provides higher exploration accuracy than its peers and is several times faster than current techniques of looking for oil, thus reducing costs.
One of these cutting-edge technologies is Rex Virtual Drilling (Rex VD), a software-based tool that enables the detection of oil wells in both onshore and offshore fields using seismic data interpretation techniques. Essentially capable of “seeing the oil in the ground”, Rex VD uses resonance frequency theory to identify and characterise reservoirs in the areas to be drilled, thereby substantially lowering the chances of hitting a dry well.
Rex Technologies claims a more than 50% success rate in exploratory drilling, compared with 10% to 15% using conventional methods. And the good news is that Rex International has been granted an intellectual property licence to use this technology.
Rex International’s business model is to acquire minority stakes in more concessions in the early stage at a low cost, in return for using its proprietary technologies. The company will then develop the concessions and eventually realise its value through the sale of its stake. The company’s advantage lies in the exploratory drilling phase, not the development drilling phase. This means the success of Rex International is also highly dependent on the capability of the technology, says DBS analyst Suvro Sakar in a Sept 23 report. And unlike oil and gas plays like Ramba Energy or Mirach Energy, Rex International does not operate oilfields or produce oil, says Sakar.
Currently, Rex International has stakes in 15 concession areas in mature oil and gas development areas such as the US, the Caribbean, Norway, Oman and the United Arab Emirates. Over the next three years, it plans to acquire stakes in new concession areas. It is targeting to hold stakes in about 20 licences by year-end. The company has strong partnerships with local and international players, which give it access to funding as well as operational expertise. Some of its partners include Malaysia’s Hibiscus Petroleum Bhd, Fram Exploration ASA of the US and Norway’s North Energy, which reported an 85% success rate in using Rex VD to predict drilling results in 41 prospects over a two-year period.
To date, Rex International has not sold any concessions. The company, however, should begin generating cash flow when it starts flipping its oil and gas assets. This move will not only crystallise value for shareholders, but also provide Rex International with the financial muscle to identify and drill more concession areas, says Sakar. It is currently at the phase of looking for concessions; its next phase would be to realise value through the sale of its assets.
Since its listing, Rex International has gone up by 45% to 82 cents on Oct 14, or 4.34 times its book value. The price had touched a peak of 93 cents on Sept 24. Sakar has a “buy” call on the stock with a price target of $1.27, which implies about a 50% upside at its current price. Sakar believes Rex is positioned to capture the highest value in the exploration and production value chain through successful discoveries and limiting capital expenditure requirements in expensive offshore areas. He expects the company to rapidly add on to its licence portfolio, while also delivering on its drilling programmes in various regions, with the first well results from Oman in early 2014.
Publish date: 21/10/13