Nicolas Van Broekhoven

Insight Provider

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Rex International Holding Limited is a production and exploration oil company with concessions in Norway, UAE, Oman, and the US.

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<li>
<a href="https://www.smartkarma.com/entities/rex-international-holding" target="_blank" data-smartkarma-citation="entities:17074:1" rel="noopener">Rex International Holding (REXI SP)</a> reported FY21 results in late February which showed a dramatic improvement over FY20 due to rising oil prices and increased production</li>
<li>Accounting wise the picture was muddied by auditor fantasy valuation exercises which understated FY21 results. FY22 to be a "clean" year where positive cash flow impact becomes clearer to market.</li>
<li>Since 08/03/22 Rex trades on the SGX mainboard and remains the best pure-play oil bet in the Singapore market. Current oil prices indicate an FY22 cash flow bonanza.</li>
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<li>Last month a new options program was announced, board members have two milestones to meet by 8/4/2024: get the stock over 0.45 SGD (50% vesting) &amp; 0.60 SGD (50% vesting)</li>
<li>Rex's production in Oman has disappointed but AGM commentary makes us believe the worst is now behind us. A recent Straits Times interview confirms 20K BPD remains the LT target.</li>
<li>Rex has instituted a good dividend policy and should now max out its 10% annual buyback authorization before dividends are paid later in FY22; win-win situation for shareholders and board.</li>
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<li>Rex will soon close a disappointing 1H22 as equipment upgrades and maintenance hamper production in Oman. Recently production was halted again due to a small oil leak in its flowline.</li>
<li>Norway's production has been declining in 1H. Rebound hopefully in 2H. New bond financing was announced for more Norwegian M&amp;A. Malaysian assets to get the green light in 2H22.</li>
<li>Rex remains very cheap but needs to deliver on operational milestones to unlock value. YTD share price performance has lagged sector peers substantially.</li>
</ul>

Earlier this week <a href="https://www.smartkarma.com/entities/rex-international-holding" target="_blank" data-smartkarma-citation="entities:17074:1" rel="noopener">Rex International Holding (REXI SP)</a><a href="https://links.sgx.com/FileOpen/20210616_RIH_PressRelease_LimeAcquiresProducingBrageField_Final.ashx?App=Announcement&amp;FileID=671402" target="_blank" rel="noopener">announced</a> that its 90% subsidiary Lime Petroleum would be acquiring a minority stake from <a href="https://www.smartkarma.com/entities/repsol-sa" target="_blank" data-smartkarma-citation="entities:21292:1" rel="noopener">Repsol SA (REP SM)</a> in the Norwegian Brage oil field. In contrast to the rest of Rex's Norwegian assets which are mainly exploration targets, the Brage oil field has been producing oil since 1993 and reached its peak production in 1998. Lime paid 42.6 million USD for a 33.84% stake in Brage (please note it has significant amount of deferred tax assets included here). Interestingly, the transaction has been backdated to start 1 January 2021 so accounting wise Rex will book the cash flows associated with Brage in its full year 2021 report. The 1H21 report was already going to show great cash flow production from its Yumna field in Oman. The just announced acquisition in Norway just adds to this for 2H21 once the deal closes in September. Risks to closing of the transaction is the successful placement of a 2.5 year 60M USD bond in Norway (expected interest rate 10%). Norwegian investors are very familiar with oil companies so we expect no issues in placing the debt.
Why was Rex able to buy such an asset from Repsol? The Spanish oil giant is clearly divesting marginal oil investments as earlier this month <a href="https://www.smartkarma.com/entities/hibiscus-petroleum-bhd" target="_blank" data-smartkarma-citation="entities:20775:1" rel="noopener">Hibiscus Petroleum (HIBI MK)</a> announced it bought Repsol's Vietnam and Malaysian assets for 212.5 million USD. We see this as a typical board room decision by Repsol to get rid of marginal fields and the price the assets are acquired for is less important.
Oil = The New Tobacco? While oil companies have been put in a bad light (see recent Shell and Exxon Mobil news) the reality is that oil consumption will be with us for decades to come and cuts in capex by the majors are likely to lead to higher oil prices. For non-ESG obsessed investors the oil industry reminds us of the tobacco industry 20 years ago. ESG agnostic investors could potentially make significant returns in the oil &amp; gas sector just like tobacco investors did between 1998 to 2018.
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Rex remains a great risk/reward story as cash flow from Oman ramps up in 1H21 and cash flow from Norway gets added in 2H21. As highlighted in our previous insight we think Rex currently trades anywhere between 1x to 2x pre-tax cash flows (depending on input variables such as oil price, days production, etc). The 1H21 results in mid-August 2021 should be a wake-up call to investors. Given the age of its principle shareholders Rex remains a prime M&amp;A candidate at some point.

<a href="https://www.smartkarma.com/entities/rex-international-holding" target="_blank" data-smartkarma-citation="entities:17074:1" rel="noopener">Rex International Holding (REXI SP)</a> has been trading up recently (+61% YTD) on the back of strong oil prices (consistently above 70 USD/bbl) and expectations that its 1H21 report in August will show shareholders the significant cash flow which is being produced from its Oman assets.The deal to buy some of Repsol's Norwegian assets (see previous insight) also increases optionality for Rex's management to create value for shareholders should the SGX listing continue to trade at depressed levels. Rex has successfully completed a 60M USD bond sale to finance the transaction effectively reducing risk for equity holders.Historically, Rex owned around a dozen exploration licenses in Norway but the Repsol transaction means they will now become a producer with corresponding cash flow. Once the transaction closes later this year that creates the option to consider an IPO of its Norwegian assets on the Oslo exchange in 2022/2023. Norwegian investors are very familiar with oil producers/exploration companies and might give Rex's 90% owned subsidiary Lime Petroleum a better valuation. Rex would then hold a stake in the Yumna field (Oman) and a certain percentage in publicly listed Lime Petroleum. The eventual end-game has not changed: given the age of the principle shareholders we believe Rex will see a lot of corporate activity going forward. We are unsure of the timeframe and shape/form this takes (spin off, partial divestments, partial return of capital, one-off dividends, large share buybacks, 100% sale to different owners etc) but the latest Norway news increases the optionality for the better.

<a href="https://www.smartkarma.com/entities/rex-international-holding" target="_blank" data-smartkarma-citation="entities:17074:1" rel="noopener">Rex International Holding (REXI SP)</a> has fallen back from 0.25 SGD last month to below 0.19 SGD recently. This is despite oil prices staying around 70 USD/bbl and Rex reporting fantastic 1H21 results.Rex also announced that after Oman and Norway it is studying to develop some oil fields in Malaysia. Rex is looking to diversify its production base so they are less dependent on one country. Cash is literally gushing in from its Oman assets and will accelerate in 2H21 as its Norwegian purchase of the Brage field will be accounted for in 2H.Rex's stock is up 29% YTD but remains deep value on an absolute basis and relative to peers such as <a href="https://www.smartkarma.com/entities/hibiscus-petroleum-bhd" target="_blank" data-smartkarma-citation="entities:20775:1" rel="noopener">Hibiscus Petroleum (HIBI MK)</a>. We continue to believe Rex will at least double from current levels as at some point the growing cash flows can no longer be ignored by investors. The eventual end-game has not changed: given the age of the principal shareholders, we believe Rex will see a lot of corporate activity going forward. We are unsure of the timeframe and shape/form this takes (spin-off, partial divestments, partial return of capital, one-off dividends, large share buybacks, 100% sale to different owners, etc).

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Rex International Holding

Preview Rex International FY21 Results: Prime Beneficiary Of Rising Oil Price