Reach’s 1Q19 core loss of RM7m came below our expectations on lower than expected production volume. Core loss narrowed by 59% in 1Q19 on higher revenue and better operating efficiency. Following that, we cut FY19-20 earnings forecasts by 71%-65% on lower production volume assumption. In all, maintain HOLD with lower TP of RM0.25 (from RM0.34) pending a clear funding plan in order to execute its capex program as well as to repay the outstanding deferred consideration to MIE

Results below expectations. 1Q19 core loss of -RM7.2m came below our expectations as we have forecasted RM12.9m profit in FY19. The negative results were largely due to weaker than expected production volume. No dividend was declared, as expected.

QoQ: Core loss widened by 1.7x from -RM2.6m in 4Q18 mainly due to higher production (-10% to 2.8k bopd in 1Q19) and higher depreciation (+8.3x; absence of one-off adjustment upon higher reserves). This was cushioned by a tax credit of RM7.4m (vs RM19.4m tax expense in 4Q18).

YoY: Core loss narrowed by 59% from -RM17.7m in 1Q18 thanks to better operating efficiency resulting in a decrease in distribution cost, staff cost and admin cost coupled with higher revenue recorded (+20%). Stronger revenue was recorded this quarter despite lower production (-3% YoY) due to deferment of RM7.6m worth of crude oil from 1Q18 to 2Q18 for shipment that was caused by limitation of export quota.

Outlook. Note that the latest independent reserves review show that the 2P oil, LPG and gas reserves in the Emir-Oil Concession Block has increased by 9% YoY to 88.4mmboe as of 1-Jan-19 while the 3P reserves have fallen 5% YoY to 141.8mmboe. Reach has reduce its scheduled exploratory drilling from two to one in Yessen fields, as compared to three exploratory wells (NK-3, K-16 and K-15) in FY18. The application for Trial Production Period (TPP) license for the Yessen Field is ongoing, pending authority approval. The successful of the application would allow Reach to produce continuously from two discovery wells, Yessen-1 and Yessen-2. A water injection pilot program is planned for 2019 for reservoir pressure maintenance in the Kariman Field. Meanwhile, Reach is also planning to complete the commissioning of the Central Processing Facility (CPF).

External funding needed. In order to execute its ambitious plans in the pipeline, Reach needs to raise funds up to USD100m to repay the outstanding deferred consideration and capex with debt financing being the preferred option. Note that there is RM309.4m due to MIE Holdings Corporation in 12 months time and Reach is in discussion with the former to defer the payment.

Forecast. We slashed FY19-20 earnings by 71%-65% after imputing lower production volume and higher finance cost. FY21 earnings of RM14.0m (+14% YoY) are introduced.

Maintain HOLD, TP: RM0.25. Post earnings adjustment and fine tuning our volume assumptions, we lowered DCF derived TP to RM0.25 (from RM0.34) applying higher discount of 40% to our DCF (from 20% previously) pending a clear funding plan in order to execute its capex program as well as to repay the outstanding deferred consideration to MIE.

Source: Hong Leong Investment Bank Research - 28 May 2019