Turnaround within Reach?
Oil and gas company may have turned the corner after posting maiden profit
REACH Energy Bhd has come a long way since it bought its maiden oil and gas (O&G) asset for some RM600mil back in 2016 in Kazakhstan. Very soon after that acquisition, global oil prices started plummeting.
Against that backdrop, and while simultaneously trying to increase its production, Reach recorded losses and investors lost confidence in it. The worst could now be over, and the house is back in order.
This was most evident when the company posted its maiden profit in the second quarter ended June 30, after five consecutive quarters of losses.
“We were lucky when we bought the oil and gas field ... the oil price was at the low end. Today, oil prices have more than doubled,” Reach managing director and chief executive officer Shahul Hamid Mohd Ismail tells StarBizWeek.
He expects this earnings momentum to continue for the remainder of the year, on the back of rising global crude oil prices and a more stable outlook for its current production levels.
A stronger US dollar is also a boon to the company, which sells its oil in the currency, he adds.
To further grow Reach to the next level, Shahul says that Reach will eventually look to raise some US$50mil for capital-expenditure (capex) purposes. This is to ramp up its oil production to move closer to above 5,000 barrels a day.
At the moment, Reach is producing about 3,200 barrels of oil per day, which is 30% higher than the 2,500 barrels per day in 2017.
“We are targeting to produce about 5,000 barrels of oil a day by the end of this year,” Shahul says.
For the second quarter ended June 30, Reach posted a net profit of RM11.23mil compared with a loss of RM14.53mil a year ago, driven by higher daily productions, higher crude oil prices and some deferred revenue from the previous quarter.
Operational efficiency
Revenue in the quarter surged 66% to RM67.67mil from RM40.74mil a year ago.
Cumulatively, for the first half of 2018, Reach saw its losses narrowing to RM9.8mil from RM24.26mil previously. Revenue for the period grew 18.5% to RM110.15mil from RM85.36mil previously.
Shahul points out that Reach had done some work to up its operational efficiency, which reflected in the company’s earnings before interest, tax, depreciation and amortisation (Ebitda) in the second quarter.
In the second quarter, the group recorded an Ebitda of RM29.9mil compared to RM1.9mil a year ago.
Reach is one of three exploration and production (E&P) O&G companies listed on Bursa Malaysia.
The other two are Hibiscus Petroleum Bhd, which was also previously a special-purpose acquisition company (SPAC), and Sapura Energy Bhd.
In 2016, Reach bought a 60% stake in Palaeontol BV, which is the owner of the onshore O&G field named Emir-Oil LLP in Kazakhstan for US$154.9mil (RM638.2mil).
Reach bought the stake from Hong Konglisted MIE Holdings Corp, which kept the remaining 40%.
The acquisition has led Reach to graduate from its SPAC status to become a fullfledged E&P O&G company listed on the Main Market of Bursa Malaysia.
The acquisition was not a straightforward process, because as a SPAC, Reach would need to get at least 75% of its shareholders’ approval and those who voted against it would get their cash value per share back.
Nonetheless, Reach managed to gain overwhelming support with an 81.07% approval rate from its shareholders.
However, the challenge continues with its share price going downhill after receiving the green light to proceed with its acquisition. From 74 sen on Nov 9, 2016, its share price plummeted to a low of 29 sen on Sept 9, 2017.
The share price has recently gained momentum, rising more than 25% to 31.5 sen from its all-time low of 25 sen a share on May 30 this year.
“I am disappointed that the share price is like this because I believe the real value of Reach’s shares should be more than RM1 apiece.
“This is a young asset, only seven years in operation ... there is a lot of upside,” Shahul says, adding that the capex is important for the firm to tap into the next phase of growth.
“We want to increase our activities, and take advantage of the current oil prices,” he says. Reach’s net cash generated amounted to RM27.8mil as at June 30, 2018, in comparison to a negative cash flow a year ago.
The depressed share price has crimped Reach’s opportunity to raise funds from the equity market, and the company is now shifting its efforts to the debt market.
“Calling a placement or rights would lead to more dilution, and Reach’s share base is already large at some 1.1 billion shares,” says a banker.
Shahul says that the company’s cost per barrel is about US$8, which is among the lowest in the industry.
The oil and gas fields in Kazakhstan are said to be three times the size of Penang Island and Reach is the operator of the asset.
The field has a 20-year concession and proven reserves of 89.4 million barrels of oil equivalent.
It was producing some 2,500 barrels in 2015, and Reach has increased this to above 3,000 barrels per day this year and is expected to go above 5,000 barrels in 2019.
In comparison to its peer Hibiscus, the company is currently producing an average of 9,900 barrels per day.
For the fourth quarter ended June 30, Hibiscus posted more than a 10-time jump in net profit to RM98.75mil from RM8.65mil a year earlier.
However, Hibiscus also had undergone a tough period in the past years before it bloomed.
Its share price dipped below 20 sen a share in 2016 from its peak of above RM2 in 2013.