INVESTMENT MERIT

The proposed QA of the Emir-oil concession block in Kazakhstan appears to be attractive for shareholders to approve in the upcoming EGM this Friday given its: (i) relatively low acquisition price of USD2.9/mmboe, (ii) producing fields with immediate cash flows, and (iii) potential initiatives to further unlock value. We believe REACH will be a good trading proxy for the volatility in oil prices post QA while its cash value of RM0.75/share acts as a floor price should REACH fail to complete its QA by Aug 2017. Trading Buy call with FV of RM0.89/share.

Proposed to acquire Kazakhstan on-shore O&G asset. REACH has proposed to acquire 60% of the equity interest in Palaeontol B.V. in which holds the entire working interest in the Emir-Oil concession block and 60% of the shareholder loans from a Hong Kong listed company, MIEH for USD154.9m as a qualifying acquisition to graduate from SPAC. The proposed QA will use up c.84.4% of RM759.3m cash held in Islamic Trust Account. The voting EGM will be held on 4th November 2016. The transaction price is fairly low at USD2.9/mmboe (vs. recent similar transactions of USD3.07-7.58/mmboe) of 2P reserves considering that valuation is arrived at during low oil price market.

Early stage of production. The Emir-Oil concession block is located onshore in the Mangstau Oblast, Kazakhstan with gross 2P reserves of 89.4 mmboe of oil and gas. The block consists of four high quality sweet and light crude producing fields, two fields under pilot production and six drillable prospects. According to the independent valuation report from RPS, the block is currently producing 3.3k bbl/day of oil and 5.7mmscf/day of gas with the potential to achieve peak production of >20k bbl/day by 2021. 37% of its 2P oil reserves are classified as both developed producing and non-producing reserves, suggesting that REACH will only require additional completion work to recover oil from existing wells instead of further development for these reserves.

Potential initiatives to enhance value. REACH has identified several measures to improve the overall project IRR, including the development of LPG value chain to improve LPG sales and extraction, construction of pipelines to reduce to transportation tariff and drilling cost reduction. Such initiatives, according to the circular, are able to improve its existing IRR from 18.7% to 22.9%. Inclusive of that, the required capex to develop the block for the next three years (net on REACH’s 60%) are USD17-22m. Assuming oil prices stay at current oil prices, in our view, REACH might need to the fund capex via project/contractor financing.

Proposed placement to address potential cash shortfall. Meanwhile, REACH also has new shares placement to raise proceeds up to RM180m if the proposed QA is accepted with at least 75% shareholders’ approval. The proposed placement is intended to solely repurchase the dissenting shares to replenish the funds in the Trust Account to complete the transaction. Depending on the percentage of dissenting shareholders, the proceeds will be mainly used to settle the remaining purchase consideration as well as committed capex in 2016.

Trading Buy, with fair value of RM0.89. According to the circular, which includes the independent valuation report from RPS, the NPV of 100% gross 2P reserves of the block at 10% discount rate is worth USD511m. Hence, the implied fair value for REACH is RM0.89/share based on: (i) 60% stake in Palaeontol B.V if the QA goes through, (ii) maximum placement shares at RM0.59/share, and (iii) RM4.00/USD assumption. Meanwhile, we believe the stock serves as a good trading proxy to the volatility in oil prices. Note that there are 958.4m outstanding warrants expiring in 2022 at exercise price of RM0.75. If the proposed QA is not approved in the EGM, REACH needs to propose another QA by 15th August 2017

Source: Kenanga Research - 1 Nov 2016