KGI Research Singapore

Singapore's leading broker offering Futures, FX, Equities and Wealth Management.

Rex International Holding Ltd (REXI SP)

Company Update: 18 October 2021

Oil’s on a roll

  • Unthinkable. Brent crude is now trading above US$85 per barrel, driven by the underlying recovery in consumption, and fuelled further by the energy crisis in Europe. The oil demand uplift from the gas-to-oil switch comes as European natural gas price trades at the oil price equivalent of US$200 per barrel.  
  • Record free cash flows. Free cash flow generated by oil and gas companies are expected to break records this year with oil currently now above US$80 per barrel. For Rex, the windfall will continue to strengthen its already strong balance sheet and give it opportunities to diversify.
  • We maintain an Outperform recommendation while raising our DCF-backed target price to S$0.40, mainly as we factor in higher oil prices of US$75.

Oil’s on a roll

WTI and Brent crude futures were trading around US$82 and US$85 per barrel last Friday, near their 7-year and 3-year high respectively. Shortages of natural gas in Europe and Asia continue to boost demand for oil as supply remains tight. The IEA said on Thursday that the energy crunch is expected to boost oil demand by 500,000 bpd. On the supply side, the EIA said that crude oil output in the US in 2021 is expected to decline more than previously forecasted. As a recap, Rex’s average realised oil price was US$62 per barrel in 1H2021, which was already an almost threefold increase from the US$23 per barrel it realised in 1H2020.

Net cash to swell to more than US$200mn by 2022

For the year ahead, based on US$75 oil price, we forecast Rex’s net cash position to surge to US$217mn by end FY2022F. This is equivalent to S$293mn or 73% of the group’s current market capitalisation (based on 31.0 Sing cents share price).

Leveraging its expertise to expand into Asia

In August, Rex was awarded two production sharing contracts (PSCs) for the Rhu-Ara and Diwangsa clusters offshore Malaysia. This will be Rex’s maiden oil field project in Asia. The company will partner with local company Duta Marine. Rex will hold a 95% participating interest with Duta holding the remaining 5%. Overall, the PSCs will provide a great opportunity for Rex to expand its oil reserves and diversify its source of cashflows. We have not factored in the Malaysian’s PSCs into our valuation.

Valuation & Action

We maintain an Outperform recommendation while raising our base case TP to S$0.40 (from S$0.33 previously), as we raise our oil price forecast from US$65 per barrel to S$75 per barrel. Our DCF-backed valuation assumes a WACC of 11.0%. Accordingly, we raise our bull case TP to S$0.50 and our bear case TP to S$0.27. Rex’s strong balance sheet, free cash flow generation and access to capital, differentiates it from many other E&P companies. Rex is the only game in town (at least on the SGX) for investors looking for direct exposure to the neglected O&G sector.

Valuation & Action

We maintain an Outperform recommendation while raising our TP to S$0.33, based on discounted cash flow with a WACC of 11.0%. Rex’s strong balance sheet, free cash flow generation and access to capital, differentiates it from many other E&P companies. Rex is the only game in town (at least on the SGX) for investors looking for direct exposure to the neglected O&G sector.  

Risks

The direction of oil price is the biggest driving factor of profits. U.S. shale production represents the largest supply variable. There is an ongoing claim against two of Rex’s subsidiaries in Oman; Rex has assessed that there will be no material financial impact from the claim.


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