Investment Merits

• Stake in Kazakhstan oilfield

• Beneficiary of higher crude oil price

• Future upside from central processing facility

Company Profile

Reach Energy is a special purpose acquisition company (SPAC) with a 60% stake in a Kazakhstan oilfield.

Highlights

The asset. Reach Energy owns a 60% stake in Paleontol BV, the owner and operator of the Emir Oil concession block in Kazakhstan. The Emir Oil concession block is an onshore field located in the Mangystau Oblast, in the South West region of Kazakhstan. The block has a total contract area of approximately 850.3 square km. The asset comes with four producing fields – Aksaz (gas), Dolinnoe, Emir and Kariman (oil) – with an exploration area of approximately 804.8 square km, comprising two development fields and six future prospects. The oilfield is based on a concession fiscal regime with a period of production until 2036.

Reserves and location. Based on RPS Energy, an independent oilfield consultant, the block is estimated to hold 2P gross reserves of 70mbbls of oil with a 2P associated gas gross reserve of 116.3bn of standard cubic feet (Bscf). 3P reserves are estimated at 116.1mbbls and 184.1Bscf of gross oil and gas reserves respectively.

Future upside. Apart from on-going efforts to upgrade its 3P reserves to 2P reserves, the group is expected to start operations at a new central processing facility, scheduled to come on-line in early 2017. There are also plans to construct a 25km oil and 35km gas pipeline to state-owned trunk lines, which would reduce transportation costs.

Company Report Card

Latest results. Reach Energy’s FY16 net profit came in at MYR131m. The Emir Oil concession only contributed one month of revenue to the company as the deal was finalised in Nov 2016.

Balance sheet/cash flow. The company has zero borrowings while its cash balance stood at MYR106m. Cash flow for FY16 was negative as Reach Energy paid USD155m for the 60% stake in the concession.

ROE. ROE for FY16 came in at 33%, which included a negative goodwill of MYR143m from the acquisition of a stake in the concession.

Dividend. Reach Energy is expected to pay 30% of its free cash flows as dividends. We expect the company to start paying dividends in FY17.

Management. Reach Energy is led by its executive director, Ir Shahul Hamid, bringing with him more than 36 years of experience in the oil & gas industry.

Recommendation

We believe Reach Energy is a beneficiary of higher crude oil prices given its stake in the Emir Oil concession. We expect crude oil price to average USD60 per bbl over the long term. We value Reach Energy using DCF methodology for its concession, with a WACC of 10% - on par with other oilfield valuations – arriving at a fair value of MYR1.14. Based on our estimates, every 5% positive movement in crude oil price would increase our fair value by 17%. We do not have a rating on Reach Energy at the moment.

Source: RHB Securities Research - 5 May 2017