Samantha Chiew Fri, Jul 08, 2022
UOB Kay Hian is reiterating its “buy” recommendation on oil production and exploration company Rex International, but with a lowered target price of 45 cents from 58 cents previously.
This move by analyst Llelleythan Tan in his July 5 report was mainly due to a decline in production, as the group went ahead with maintenance works. However, these works are expected to be a positive for the group on the longer term.
For the group’s operations in Oman, oil production from February to April was lower than estimated due to major upgrades and repair works which temporarily halted production. Some of the upgrades include the replacement of a new floating storage tanker and a change-out of the Mobile Offshore Production Unit (MOPU). These new upgrades are meant to maximise oil recovery as the wells tend to naturally deplete over time.
As a result, average monthly oil production for the February to April period was at 2,237bbl/day, 4,637bbl/day and 1,271bbl/day respectively, lower than the analyst’s 9,500bbl/day average estimates for 2022. For May, average monthly production has recovered back to 4,800bbl/day post-upgrades but Tan is expecting to see a sharp moderation in June due to an operational issue with a pump in the Yumna field, which has halted production since June 11 and is expected to resume in early-July.
Looking forward, a targeted drilling campaign of two additional wells has been planned for October and November.
For the Brage field in Norway, oil production from February to May has been steady at 2,700-3,561bbl/day, well within the analyst’s 2,900bbl/day 2022 estimate.
Additionally, Rex is growing its Norwegian portfolio, as it has recently signed an agreement to acquire 30% interests in licenses PL820 S and PL820 SB in Norway, which are currently still pending approval.
These licences contain the Iving and Evra discoveries which are estimated to hold around 11.5mmboe of resources. In addition, the licence areas include several sizeable exploration prospects and are located adjacent to existing infrastructure, removing the need for further capex. Rex intends to eventually operate these licences and mature them further.
Meanwhile, Tan expects the current elevated oil prices to remain going into 3Q2022 alongside a tight supply. “Demand for oil is expected to pass pre-pandemic levels, according to the Organisation of the Petroleum Exporting Countries (OPEC), although the risks of a recession, China’s Covid-19 lockdowns and worsening geo-political developments may soften demand,” says Tan.
While the analyst expects supply to improve as OPEC has committed to phase out production cuts and boost production in July to August, the upcoming hurricane season in the Gulf of Mexico along with political unrest in Libya and Ecuador may hamper oil production.
On the other hand, Rex is increasing value to shareholders. In its recent extraordinary general meeting (EGM), the group proposed a renewal of share buyback mandate, which saw 100% of its shareholders voting in favour of this mandate. This means that Rex is now able to purchase up to 10% of total issued ordinary shares either through market or off-market purchases, at a maximum of 105% and 120% respectively of Rex’s average closing market price.
Rex has also set up a regular dividend policy whereby a total annual dividend of 2 cents per share, representing a 7.7% dividend yield, which would be paid out quarterly starting 1QFY2023 ending March 2023, subject to Rex’s profitability and the board’s discretion. The first maiden dividend of 0.5 cent per share has been proposed, payable on Oct 10.
With the counter’s strong dividend yield of 7.7%, Tan opines that Rex is an attractive pure-play on the ongoing oil super cycle at current price levels.
“However, we are cautious of any moderation in oil prices that may depress share price performance sharply. Therefore, taking a conservative view, we have incorporated a 10% discount to account for any future volatility,” he adds.
As at 3.05pm, shares in Rex are trading 2.08% higher at 24 cents or 4.2x FY2022 earnings.