The initial drilling of K-16 forms part of Reach’s FY18 non-discretionary capex program. We understand that K-16 has a high chance of success since it is close to the producing field, with the potential to increase the 60%-owned Emir Oil asset’s 2P reserves (100% gross) to exceed 100 mmboe from current level of 81mmboe. Pending the drilling outcome, we make no change to our earnings estimates. All in, we maintain HOLD recommendation with higher DCF-driven TP to RM0.41 by narrowing the discount to DCF valuation to 20% (from 30% previously) in view of higher chances of securing external funding to unlock its valuation amidst stronger oil prices.

NEWSBREAK

Reach announced that the Kariman #16 (K-16) vertical exploration well has been spud on 6 October 2018, targeting an identified highly graded hydrocarbon trap in close proximity to the west flank of Kariman field. The total drilling duration is expected to last for 120 days, undertaken by a mix of local and international service providers such as Sinopec, AsiaPetroService, Drill-Lab Kazakhstan, and KazPromGeofizika.

HLIB’s VIEW

Part of FY18 capex program. This is not a surprise to us as it is part of Reach’s USD9m FY18 non-discretionary capex program. Apart from this, another exploration well, West Kariman-1 (WK-1), which is located to test a significant structure in line with some prolific wells to the south of the Emir Oil Block has also been identified for drilling this year. The drilling cost is only payable to the service provider 18 months later.

Good chance of success. We understand that K-16 has a high chance of success since it is close to the producing field. We understand that the success of this exploration well could potentially increase the Emir Oil asset’s 2P reserves (100% gross) to exceed 100 mmboe from current level of 81mmboe if they are able to identify further hydrocarbon resources. We believe that the further development cost to monetise K-16 may not be substantial given its close proximity to existing infrastructure.

TPP of NK field to lift production in FY19. Its producing asset in Kazakhstan, Emir Oil LLP has recently obtained authority approval to commence Trial Production Period (TPP) of the North Kariman (NK) Field for 15 months, from 1 October 2018 to 31 December 2019. The TPP approval allows Emir-Oil to put the NK wells on production and pursue a new production contract for the NK Field.

Forecast. Note that we have yet to factor in new potential new discovery in our estimates. Pending drilling outcome, we make no change to our earnings estimates.

Maintain HOLD, TP: RM0.41. Overall, we are positive on the operational improvement in 2H18 and FY19 with higher production but future growth beyond that is capped unless external funding is secured. All in, we maintain HOLD recommendation with higher DCF-driven TP to RM0.41 (from RM0.35 previously) by narrowing the discount to DCF valuation to 20% (from 30% previously) in view of higher chances of securing external funding to unlock its valuation amidst stronger oil prices. Note that the successful discovery of K-16 of (assuming 20 mmboe) would add to our DCF-driven TP by another 20%.

Source: Hong Leong Investment Bank Research - 9 Oct 2018