RH Petrogas: Market Loses Sight Of Fundamental Value
(BUY,SGD0.54, TP: SGD1.38)
RHP’s share price fell by almost 20% on news that the Zircon-1 well did not flow. This is equivalent to a SGD99m loss in market value due to a well costing SGD8m, and whose cost is recoverable. Meanwhile, the stock is trading at a 44% discount to its production assets alone, ascribing zero value to 1,074mmboe of 2C and prospective resources in appraisal, development and exploration assets. Reiterate BUY, with SGD1.38 TP.
Loses SGD99m in market value in relation to recoverable SGD8m well. Fundamentally, apart from having spent SGD8m (recoverable from existing oil & gas production under the PSC terms), little has changed in RH Petrogas (RHP). The entire Zircon prospect is worth only 2.5% of the company’s intrinsic value. The rapid loss of market value has given rise to a clear divergence between price and value, with irrational fear overriding reasonable valuation.
44% discount to RHP’s production assets’ value. RHP’s enterprise value now stands at USD295m, which is a sharp 44% discount to the USD525m value of its production assets (the producing areas in Basin, Island and near-production Fuyu). Investors are getting the 64.5mmboe of 2C resources and 1.04bn bbls of prospective resources for free.
Devon Energy just bought 400mmboe of Eagle Ford oilfields for USD6bn. Yesterday, Devon Energy (DVN US, NR) purchased GeoSouthern Energy’s 400mmboe of reserves in Eagle Ford for USD6bn in cash, equivalent to USD15 per barrel. Note that Eagle Ford is an unconventional shale field producing light oil, which should have a lower NPV/bbl value compared to RHP’s conventional fields. This supports our USD14.6-16.1/bbl NPV valuation for RHP’s conventional light-oil assets and our USD10/bbl NPV for the unconventional heavy Fuyu oil. RHP’s production assets are worth SGD0.90 per share, based on our conservative assumptions.
Panic selling gone too far. The panic selling in the last month has been excessive, and predicated on miscomprehension of the technical terms and operational procedures described in RHP’s announcements. We believe that the fundamental value of RHP will be reflected in the share price given wider investor education. Smart money should average down and await the eventual revaluation. Reiterate BUY, with SGD1.38 TP.
Publish date: 22/11/13