Monday, November 25, 2013

Rex International : No change in potential (DBSV)

Rex International
BUY S$0.615
STI: 3,172.38
Price Target: 12-Month S$1.15 (Prev S$1.27)
No change in potential

• Foray into oil well stimulation technology through tie-up with Swiss firm could yield complementary earnings stream in future
• Meanwhile, progress on new licence adds and drilling plans at existing assets are all on track
• Balance sheet fortified by share placement
• Thus, recent sell down seems unjustified; reiterate BUY with adjusted TP of S$1.15

Another game-changing technology in hand? Rex will be investing US$20m for a 67% stake in Rexonic, which will own a proprietary environmentally-friendly, high-power ultrasound technology for commercial oil well stimulation developed by Swiss partner Ogsonic AG. This technology is intended to replace traditional chemical methods and has been shown to increase oil production from 30% to 380%, both onshore and offshore, according to management. This JV will target the oil & gas production phase, and being complementary to Rex’s existing offerings in the exploration phase, offers cross-sell opportunities. Rexonic has already signed contracts with three major NOCs and could contribute a recurrent earnings stream within the next few years.

Drill campaigns all on track. Drill results from the first well in Oman can be expected around end-December 2013, and the second well around 40 days later. While the developments in Oman are likely to be of much interest to the market, Rex is also aiming to drill another 5-7 offshore wells in various areas in 2014, and looking to grow its portfolio from the current 15 licences to 30 licences over the next 18-24 months, potentially providing a constant stream of newsflow and catalysts.

Maintain BUY for 85% upside potential. Our TP for Rex is adjusted down to S$1.15, as we factor in a bigger share base arising from the recent share placement, as well as consideration shares issued to fund the acquisition of the Rexonic stake and an additional stake in Rex Caribbean. However, we believe the story for Rex remains intact, as highlighted above, and the recent sell down thus presents a good buying opportunity.

How has the story progressed since IPO?
Proposed first foray in Asia-Pacific region through HIREX JV. In late September, Rex announced that its 41%-owned JV HIREX Petroleum had entered into a collaboration agreement with ASX-listed Bass Strait Oil Company (BAS) to participate in specific exploration opportunities in the Gippsland Basin in Australia. HIREX and BAS will work together over the next three months, to apply the Rex Virtual Drilling technology and integrate it with conventional geological and geophysical data, to reassess the prospects of the Vic/P42 permit in the Gippsland Basin. If results of the evaluation are encouraging, HIREX may then commit to acquiring a 51% participating interest in the permit and to drilling an exploration well in the 2014/2015 timeframe.

The Vic/P42 permit (933 sq km) is 100%-owned and operated by BAS and is located approximately 40 kilometres off the coast of Victoria state in Australia and contains moderate water depths from 50 to 80 metres. The permit is located adjacent to Kingfish, Australia’s largest oil field, as well as the Bream, Tarwhine and Dolphin producing fields. The permit is almost entirely covered by modern 3D seismic surveys and is close to developed regional infrastructure. Rex restructures its holdings in Fram and US/Caribbean assets.

As the first part of the restructuring, Rex International Holdings’s wholly-owned subsidiary, Rex US has entered into an agreement with Fram to exchange Rex US’s 20% direct interest in Fram’s Colorado and North Dakota concessions into an additional stake in Fram. Before this agreement, Rex held a direct 24% interest in Fram, while its subsidiary Rex US held a 20% direct interest in the Colorado and North Dakota concessions. After the transaction as described below, Rex will hold approximately 27.7% of the issued share capital of Fram and no direct interest in the Colorado and North Dakota concessions in the US.

No further capital commitments to US work programme. Rex US will convert the payment due for part of the work programme already fulfilled under the farm-in agreement between Rex US, Loyz Energy and Fram, together with a cash payment of US$4.51m to Fram, for new shares to be issued by Fram. Pursuant to this exchange, Fram and Loyz will continue with the remaining work programme from which Rex US will exit. The New Fram Shares will be issued at the same price per share as the share swap conducted between Fram and Rex International Holdings in April 2013, and in aggregate, is valued at approximately US$ 7m. The New Fram Shares constitute 3.7% of the issued share capital of Fram. By way of this exit, Rex will be saving about US$20m in capex commitments over the next two years, according to our estimates.

Increased shareholding in Rex Caribbean. As the second part of the Restructuring, the Group is acquiring a larger 64.17% stake in the licence-holding company Caribbean Rex  Limited, instead of the initially stated 51.99% stake. Rex International Holdings will acquire the additional stake in Caribbean Rex from Fram for approximately US$3m, by the issuance of new ordinary shares in the capital of Rex at an issue price of S$0.83 per share. Consideration for the initial stake in Caribbean Rex amounting to US$9m in cash has already been paid. Upon completion of the transaction, the three shareholders of Caribbean Rex will be Rex International Holdings (64.17%), Pareto Staur SPV I AS (34.76%) and Mr. Geoffrey Leid, CEO-designate of Caribbean Rex, in his personal capacity (1.07%). We believe this overall transaction is largely value neutral, as the increased direct stakes in Fram and Rex Caribbean offset the loss of direct interests in the US assets and limit capex commitments.

US drilling campaign progress largely on track. While there have been some delays in the drilling process owing to unexpected weather conditions, SGX-listed Loyz Energy announced in late October that first oil has been drawn from the North Dakota and Colorado assets in the US. Loyz has a 20% net revenue interest in the asset, while the remaining is
held by Fram, following the exit of Rex US. According to Loyz Energy management, the first well was spudded in North Dakota on 7 May 2013 and production flow is already underway in the Schlak #3 well in North Dakota, where initial flow tests indicate varying flow rates up to 50 barrels per day. In Colorado, flow tests are being carried out now and will continue over the next few weeks, the results of which will be announced in due course.

Oman drill results expected in the near term, plans for further drilling campaigns in 2014 firming up. Our recent update from management indicates that the first offshore well is on track to be drilled in Oman within the next two weeks and drill results could be expected around end-December 2013 at the earliest. The results from the second well in Oman can be expected around 40 days after the first well. Apart from the developments in Oman, which are likely to be of much interest to the market in terms of adding further credibility to Rex’s exploration technology advantage, Rex is also aiming to drill another 5-7 offshore wells in 2014. Two of these wells will likely be drilled at its Norwegian concessions, one each in RAK Offshore and Sharjah under Lime Petroleum’s Middle East portfolio, and the remaining in other regions to be identified, potentially in SE Asia and Oceania.

Joint venture formed in well stimulation. Rex has recently formed a joint venture company Rexonic AG with Swiss firm Ogsonic AG, wherein Rex will hold a 66.7% stake and Ogsonic the remaining 33.3%. The total consideration of this stake acquisition will be US$20m – to be satisfied via U$10m cash and US$10m worth of new shares in the capital of Rex to Ogsonic. The new shares will be issued at a price of S$0.787 (7-day VWAP preceding the signing of the agreement with Ogsonic).

Ultrasound technology instead of chemicals for well cleaning. Rexonic will own the world’s first environmentally-friendly, high-power ultrasound technology for commercial oil well stimulation that has shown to increase oil production from 30% to 38%, both onshore and offshore. The proprietary,

patented technology is highly efficient in cleaning the production well bore from typical oil production inhibitors such as wax, paraffin and salt deposits, thereby significantly increasing the flow of oil into the well bore, as pore space and permeability are restored. The technology can be used for stimulating oil wells with declining production, as well as reviving wells with low output.

Three key elements to the proprietary technology. The process involves setting up the required electrical power supply system, converting it to mechanical energy, and finally the right resonating system/tuning fork to ensure it functions at the depths of the well perforation zone. The alternating low-pressure and high-pressure waves lead to ultrasonic shear waves in the well and surrounding rock, which reduces the friction in the media and improves oil flow into the well bore. The ultrasonic waves create cavitation, which causes mechanical removal of particles and reduces the viscosity of the liquid without the use of chemical agents and steam generators.

Stretches Rex’s business model all the way from exploration phase to production phase. Rexonic’s enhanced oil recovery technology will be a good complement to Rex’s core competence in oil exploration using the proprietary Rex Technologies. Like Rex Technologies, Rexonic’s ultrasound technology can be considered game-changing, but in the early adoption stage. Once ramped up, Rexonic will contribute a complementary, recurring revenue stream to Rex’s main activities in oil exploration.

Ogsonic has been operating since 2008. Ogsonic AG was founded as a spin-off of a leading industrial ultrasonic application provider to solely concentrate on the development and production of ultrasonic solutions for the oil and gas industry. The founding members are current CEO Mr. Andreas Karl Kuhne, a veteran in the financial services and startup areas, and CTO Mr. Peter Spenger, who previously owned and managed the industrial ultrasonic company, Telsonic AG, for more than 17 years. The first pilot tests of the technology
were conducted in 2009 in Mexico and Romania.

Demonstrated significant increase in oil production. According to management, the technology has showed that it is possible to increase oil production by 30% to 380% across both onshore and offshore wells in test conditions in Central and South America. This can result in significant earnings accretion for oil producers. A simple case study shown below shows that a 30% enhancement in production for an existing 100bopd well can result in revenue increase of more than US$1m per year if the production can be sustained. The returns on investment can be, thus, quite attractive.

Contracts have already been signed, showing commerciality of the technology. In a reassuring sign for investors, management of Ogsonic indicated that they have so far signed contracts with three major national oil companies in South/ Central America and Asia. The contracts can either be service based – where the well stimulations will be carried out by the company’s own team and payments will be day rate-based – or a licence fee-based model, where the well stimulations will be carried out by the customer’s team using technology licensed from the company. Service model contracts usually tend to be open-ended, with the customer requesting for well stimulations as and when required on a recurring basis. Management also indicated that current contracts run into 2016, and the company should be profitable within the next few years, given that there are sizeable opportunities to gain market share in the global well stimulation market likely worth more than US$20bn, covering close to 750,000 operating wells worldwide.

Balance sheet bolstered by share placement. To part finance the acquisition of its 67% stake in Rexonic and invest in other new business opportunities, Rex has also placed out 70m new shares through a private placement exercise at a placement price of S$0.755 per share in late October, raising up to approximately S$52.85m gross proceeds. The placement price of S$0.755 per placement share represented a discount of 9.6% to the 1-day VWAP price of S$0.8356 for each share on 25 October 2013. With the proceeds from this placement adding on to the gross IPO proceeds of S$85m, we believe Rex is sufficiently capitalized to deliver on its organic and inorganic growth strategies.

Valuation diluted to an extent by issuance of new shares. Our TP for Rex is adjusted down to S$1.15, as we factor in a bigger share base arising from the placement shares issued, as  well as the consideration shares issued to fund the acquisition of the Rexonic stake and an additional stake in Rex Caribbean. To recap, our valuation for Rex is based on a sum of the parts enterprise value comprising: i) Its 27.7% stake in Fram Exploration, which holds 80% interest in the US concessions, ii) A 65% stake in Lime Petroleum, which holds several exploratory licences in the Middle East and Norway, iii) A 64.2% stake in Rex Caribbean, which has  interests in three licence areas in Trinidad & Tobago, and iv) The recently acquired 67% stake in Rexonic, a provider of ultrasound-powered oil well stimulation services.

Source/Extract/Excerpts/来源/转贴/摘录: DBSV-Research,
Publish date: 22/11/13

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