We are positive on the MOU entered with GPC as it provides the opportunity for Reach to venture into downstream oil & gas business and strengthen its presence in Kazakhstan. Should the collaboration turn out well, Reach might be able to further monetise its non-associated gas reserves in the longer run. We make no changes to our earnings forecast as it is still in the discussion stage. All in, we maintain HOLD recommendation with unchanged DCF-driven TP of RM0.41.

NEWSBREAK

Reach has entered into a Memorandum of Understanding (MOU) with Gas Processing Company LLP (GPC) in order to diversify its business portfolio into downstream oil & gas business. GPC processes feed gas secured from Kazakhstan state-owned national gas pipeline operator, KazTransGas (KTG) into valuable products such as liquefied petroleum gas (LPG), gas condensate, and sulphur. The MOU is valid for 12 months starting from 19 Nov 2018.

HLIB’s VIEW

Venture into downstream. We are positive on the MOU as it provides the opportunity for Reach to venture into downstream oil & gas business. In addition, GPC’s strong ties with the local Kazakhstan government and state-owned enterprises are able to strengthen Reach’s presence in Kazakhstan. Note that GPC has the concession license from KTG to process feed gas into downstream products for sale to export and domestic end-users till 2040. Therefore, we do not discount the possibility of Reach partnering with GPC to execute new gas utilisation project or acquiring an equity stake in GPC’s existing processing plant. We understand that a gas processing plant would cost USD30-40m and the capex outlay required by Reach will depend on the percentage of equity stake involved. Reach is likely to fund such venture via project financing.

Monetise its gas reserves in the long run. Should the collaboration turn out well, Reach might be able to further monetise its non-associated gas reserves in the longer run. Gas reserves accounted for <20% of its total reserves in its Emir Oil Concession Block as of end-FY17. However, gas sales only contributed 3% of its total revenue in FY17 with an average daily production rate of 4922 mscf/d due to low domestic gas value.

Forecast. We make no changes to our earnings forecast as such collaboration is still in discussion stage.

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 unchanged DCF-driven TP of RM0.41.

Source: Hong Leong Investment Bank Research - 21 Nov 2018