RH Petrogas Limited - Under crude price pressure; the sun is not shining yet

RHP reported its first quarter of negative EBITDAX (-US$1.32 mn) as crude price drifted to ~US$50/bbl, close to the company’s breakeven oil price. CS’s outlook is that crude price will stay at this level for the next two quarters.

The company also announced a write-off of US$76.5 mn (33% of non-current asset value). This shrunk its equity base, thus raising gearing from 18% to 29%, leaving less room for raising development funding.

Commercial production from Fuyu-1 (China) will be deferred. Its development drilling at Fuyu-1 block (China) has 14 completed wells. Even with a catch-up schedule of 13 wells in 4Q15, it is unlikely to meet the planned schedule of 40-100 wells in 2015.

We reduce our target price from S$0.20 to S$0.15. Pushing out Fuyu Phase 1 drilling lowers the asset value. With the delay in Fuyu Phase 1, we further increase the risking of Fuyu Phase 2 from 30% to 15%. 2015E adjusted EPS is reduced from -US¢1.7 to -US¢2.8. Downgrade from Neutral to UNDERPERFORM.

Crude hovers around RHP's breakeven oil price
RHP reported its first quarter of negative EBITDAX (-US$1.32 mn) as crude price drifted to ~US$50/bbl, close to the company’s breakeven oil price. It also reported -US$1.9 mn of operating cash flows before changes in working capital. CS’s outlook is that crude price will stay at this level for the next two quarters. RHP’s production is almost wholly crude oil.

Assessment of asset value results in significant write-off
The company also announced an impairment charge of US$76.5 mn (33% of non-current asset value). This is the second write-off after the US$20.5 mn impairment made in 3Q14. The US$76.5 mn charge comprised impairment losses on goodwill of US$43.6 mn from the acquisition of Fuyu-1 block (China), on oil & gas properties of US$17.6 mn in Basin and Island PSC (Indonesia), and on exploration and evaluation assets of US$15.4 mn in Island PSC.

Impairment losses shrunk equity base and reduced gearing flexibility
The company’s equity base is reduced, thus raising gearing [total debt/(debt + equity)] from 18% to 29%. We were Neutral earlier as the company held some balance sheet strength. There is now less room for raising development funding when higher gearing is coupled with less attractive financial performance and the macro outlook.

Commercial production from Fuyu-1 (China) deferred
RHP completed 14 development wells at end-October. Even with a catch-up schedule of 13 wells in 4Q15, it is unlikely to meet the planned schedule of 40-100 wells in 2015. Commercial production will be deferred. We push back the drilling schedule at Fuyu-1 block Phase I.

Technical Analysis
Daily Chart
Reduce target price from S$0.20 to S$0.15
Pushing out Fuyu Phase 1 drilling lowers the asset value. With the delay in Fuyu Phase 1, we further increase the risking of Fuyu Phase 2 from 30% to 15%. We reduce 2015E adjusted EPS from -US¢1.7 to -US¢2.8. We downgrade it from Neutral to UNDERPERFORM. (Read Report)

Source : Credit Suisse Asia Pacific Equity Research

Labels: ,