Highlights

• More on QA. The recently released circular revealed more details on the proposal (submitted earlier) to acquire 60% stake in Palaenotol B.V., holding company of Emir-Oil, and 60% of shareholders loan for a sum of US$154.9m. Voting by shareholders would be done in the EGM on 4th November 2016.

• Emir-oil, balanced portfolio with high quality, high API crude. Emir-oil current possesses 4 producing fields coupled with 2 development fields and 6 drillable prospects, pointing to high potential growth in pipeline of reserves. In addition, it also produces high-value light and sweet crude oil and possesses high condensate yield in one of its producing fields, complemented with existing infrastructure and gas evacuation facilities in place.
• Acquisition valuation attractive. Weak oil market has served the company well as it enables the company to be able to acquire Emir oil at bargain pricing with no abandonment charges in midterm . Excluding working capital adjustments, implied price/bbl is at US$2.9/boe, at the lower end of Kazakhstan transacted prices. The deal was also done when oil prices are at USD30-40/bbl range, 1Q16 this year.
• Significant upside potential. Out of 70m bbls of 2P reserves, 29.3m bbls are developed reserves of which more than half of it is producing while the remaining is shut-in, representing low hanging fruit for the company.In addition, the company has also identified 3 major value-adding measures which require minimal CAPEX: (i) LPG extraction facility (already completed by MIEH) (ii) transportation tariff reduction of USD2/bbl through pipeline tie-in (iii) well cost reduction of US$1.95m/development well.

• Investing in CPF to remove bottleneck. Currently, the field’s production is limited to a ceiling of 6,548 bbls/day due to constraint of its leased oil processing facility. Therefore, its Vendor in the QA, MIEH, has invested in a new Central Processing Facility (“CPF”). 1st Phase would provide processing capacity of 12,000 bbls/day while 2nd phase (construction to commence from 2020 onwards) would ramp it all the way to 23,000 bbls/day.

Catalysts

• Direct beneficiary of oil price rally.

• Completion of Phase 1 CPF

• Entering into production asset early stage provides more upside possibility.

• Expansion of 2P reserves upon successful appraisal drilling of exploration wells.

Risks

• Oil production natural decline, oilfield operational risk, country risk.

Rating

NON-RATED

• Positives – Huge potentials in Emir-Oil.

• Negatives –.Volatility in oil prices.

Valuation

• Implied valuation with reference to independent valuer stands at RM1.18/share (before warrant dilution) and RM0.99/share (fully diluted). Valuation has also included primary upside potential (3 measures mentioned above). To note, full dilution of warrants may not realize in near term as warrant expiry date is at 8th anniversary date of QA completion, indicating high time value of warrant.

Source: Hong Leong Investment Bank Research - 24 Oct 2016