Low-risk, value-accretive upstream deal
? Dialog’s proposed purchase of a 50% effective stake in an onshore Thai
oilfield operator is value accretive and low risk, according to our calculations.
? While the acquisition appears expensive at first glance, we think investors will
be comfortable with the transaction after considering the target’s high ROEs.
? Reiterate Add with an unchanged SOP-based TP of RM2.77 on Dialog’s
long-term growth potential at Pengerang (valued at 46 sen).
Dialog proposes to buy onshore Thai oilfield assets
Dialog announced yesterday that it has inked an agreement to buy a 100% equity stake
in Canada’s Pan Orient Energy Corp (POEC), which owns a 50.01% stake in Pan Orient
Energy (Siam) Ltd (POES). POES operates Concession L53/48, onshore Thailand, which
currently produces 2,700 bopd from 22 wells on seven mature oilfields located 100 km
northeast of Bangkok. The concession expires in 2035. The transaction is expected to be
completed by late-Aug 2022 at a purchase price of US$38.7m (RM170m).
Valuation of POEC is high, but may be justified by its high ROE
While the POEC acquisition P/BV multiple looks high at 2.28x, the price is justifiable
based on POES’s annualised 1Q22 ROE of 84%, or implying a P/B-to-ROE ratio of 2.71.
By contrast, Hibiscus Petroleum purchased Repsol’s assets in Malaysia and Vietnam at a
P/BV of 1.17x, which implied a higher P/B-to-ROE ratio of 4.68 when juxtaposed against
the lower ROE of 25%. Comparing against the 2P reserves, Dialog’s proposed
acquisition of POEC represents a price of US$16.73/bbl, which appears expensive
against Hibiscus’ acquisition price of US$6.16/boe. However, the more expensive
acquisition-price-to-2P-reserves for POES may be justifiable, because the economic
value of oil reserves is higher than for gas reserves which make up almost 40% of the
Repsol 2P reserves acquired by Hibiscus, while 100% of POES’s 2P reserves are oil
reserves. On the balance of probability, we believe that Dialog may have negotiated a
favourable deal for itself in the acquisition of POEC.
POES is a low-risk but accretive acquisition
The potential inclusion of POES into Dialog’s portfolio of upstream oil and gas assets
may boost Dialog’s oil production by 50%, in our estimate. POES is a mature oilfield
asset that has a low opex cost of US$7/bbl. Its only customer is a proximate refinery that
is able and willing to absorb all of its output. The acquisition price of RM170m can be
easily funded from Dialog’s cash balance of RM1.9bn. Our back-of-the-envelope
calculation is that the POEC acquisition may increase our FY6/23F net profit forecast for
Dialog by at least 11%, but most likely higher, given that oil prices have risen and the
US$ has appreciated against the ringgit after 1Q22. The implied acquisition P/E of just
2.8x is much lower than Dialog’s FY23F P/E of 23.8x, while POES’s annualised 1Q22
ROE of 84% is much higher than Dialog’s FY23F ROE of 9.6%. The key downside risk
and uncertainty is whether POEC’s shareholders will approve the sale of its stake in
POES on such good terms to Dialog.