This article first appeared in The Edge Financial Daily on July 24, 2017
KUALA LUMPUR: Reach Energy Bhd’s share price has been going downhill since last November, after it secured shareholders’ approval following a deferred extraordinary general meeting (EGM), for the acquisition of a 60% stake in Kazakhstan’s Emir-Oil fields, its first hydrocarbon asset.
From 74 sen on Nov 9, its share price plummeted to an all-time low of 41 sen on July 14. It closed at 42 sen last Friday.
“I am disappointed the share price is like this because the real value was at more than RM1 and there are a lot of upsides in this asset,” chief executive officer Shahul Hamid Mohd Ismail told The Edge Financial Daily. He was referring to the fair value given to the stock during its initial public offering (IPO) in 2014. The current price is also well below Reach Energy’s IPO price of 75 sen a share.
Yet the group remains undaunted, and is expected to generate positive returns on the new asset this year, and hopes to convince investors of the long-term value of its investment in Emir-Oil, an 850.3 sq km onshore oil and gas (O&G) exploration and production (E&P) field located in Kazakhstan’s Mangsytau oblast. Reach Energy holds the entire subsoil use rights to the field.
Reach Energy completed the purchase of the 60% stake in Emir-Oil, via the purchase of equity in Palaeontol BV for US$175.9 million, on Nov 25, 2016.
The vendor was Palaeontol’s parent company, Hong Kong-listed MIE Holdings Corp, which kept the remaining 40%. The acquisition fulfilled Reach Energy’s requirements as a special purpose acquisition company to acquire a qualifying asset within a 36-month period, allowing it to graduate into a fully independent O&G E&P company.
Shahul said the company now has a different focus, which is to consolidate operations and increase oil production.
The group plans to increase its oil production to between 4,000 and 5,000 barrels per day (bpd) by the end of the year. The company’s production levels currently stand above 3,000bpd. It currently has 54 oil wells in Emir-Oil, and plans to gradually add on another 34 by 2026.
“We took full control of Emir-Oil only in May, following a six-month handover agreement with the vendor. So it’s hardly been two months. We are now introducing our methodologies, our improvements and our way of doing things. It’s showing results. [I know because] I’m there, I’m hands-on,” said Shahul, adding Reach Energy’s focus this year and next will be on turning around the whole business to increase production and efficiency.
Yet the changes it planned have not garnered much investor interest, which Shahul said could be due to the fact investors do not appreciate the value of E&P, especially in the current low-oil-price environment.
The company, however, has made efforts to share with shareholders on the real value of its E&P, which lies in the asset’s reserves. Shahul even sought the opinion of international experts who concluded that Emir-Oil’s reserves are robust and promising.
“Even as late as this January, when they announced the latest reserve audit by international consults to stock exchanges in Kuala Lumpur and in Hong Kong, the reserves looked better than what we evaluated when we acquired this asset. It’s gone up. That should give investors and shareholders comfort to know that we are sitting on a gold mine,” Shahul explained.
“Unfortunately, this kind of asset is not meant for retail investors who are [mostly] interested in short-term plays in the market,” he added.
In August 2014, when Reach Energy made its market debut it had close to 4,000 shareholders, he shared. “By the time we had our EGM in November 2016, it was down to about 2,000, so that’s about 50% consolidation. What this stock is good for is institutional investors, the long-term investors who see the long-term value,” said Shahul, adding that the company is now trying to attract more institutional investors.
“Now would be the best time for them to buy. The share price currently is well below the value. In the long term, it will be worth it,” he plugged.
Earnings-wise, Shahul said the group is confident about turning in a profitable financial year 2017, given the group’s new methodologies and streamlined, efficient operations. For its first quarter ended March 31 (1QFY17), Reach Energy incurred a net loss of RM17.76 million, which Shahul said was mainly due to having to pay back shareholders who disagreed with the acquisition. It obtained approval from 81% of its shareholders for the Emir-Oil buy during the EGM in November.
“For the 2Q, we do expect some improvement, but investors should wait for 3Q and 4Q, they will see changes then. I am confident we will be profitable in FY17, or else I wouldn’t have gone into this [acquisition]. And for the next financial year, it will be much better,” said Shahul.
The group is still settling its outstanding payment of US$44 million for the acquisition of Emir-Oil. It proposed a share placement to raise as much as RM180 million, being just enough to settle the outstanding amount. In March, it obtained a six-month extension till Aug 22 to carry out the proposed share placement, and Shahul said the group hopes to keep to that timeline.
In terms of borrowing, Shahul said he is glad the group’s gearing was at zero. It also incurred no capital expenditure cost this year, though for FY18, it expects to use US$21.54 million to build new pipelines, which would be funded by the company or through third party funding.
On whether the group would look to diversify, Shahul said his priority for the next few years will be to consolidate operations of the new oil field. “We’re a pure upstream company and we want to remain a pure player for at least the next two [or] three years, to demonstrate the value [of our acquisition] to shareholders,” he said.
The group, however, does not rule out the possibility of diversifying into downstream services later, adding Reach Energy could benefit from the network of potential Malaysian investors the local Kazakhstan government hopes to attract.
The group signed a memorandum of cooperation with the regional government of Mangystau in southwest Kazakhstan on July 12 to help get Malaysian companies to invest between US$500 million (RM2.14 billion) and US$1 billion in Kazakhstan over the next three years.
Reach Energy’s role will be in helping to attract Malaysian companies to invest in priority industries in Mangystau, such as O&G, infrastructure, construction, electricity, water supply and tourism. “The Kazakh government wants to learn from Malaysian O&G players, and there is a lot of untapped potential in Kazakhstan. It’s a win-win situation,” Shahul said on the cooperation.