I covered Rex International previously in another article in May. You can check it out here: If You Want Exposure To The Oil Sector, You Should Invest In This Stock. I even made a buy call on them which led to a phenomenal 88.57% Gain in 41 Days.
There’s been quite a few positive announcements being made that will help Rex International break new highs this year. In this article, I’ll be going through these positive announcements as well as potential positive catalysts that might come along the way.
The company’s main activities are in offshore oil exploration in assets located in Oman and Norway.
The company owns Rex Virtual Drilling, which is developed by its Swedish founders. Rex Virtual Drilling is a liquid hydrocarbon indicator that studies resonance information in seismic data to locate hydrocarbons directly. The company believes that Rex Virtual Drilling substantially increases the chance of success of finding oil in exploration drilling and is offering the technology as a de-risking tool to other oil exploration companies.
Rex International Holding has achieved three offshore oil discoveries since its listing in July 2013; one in Oman and two in Norway. The company is also expanding its business with research into sustainable energy solutions. The company’s proposed new business in Sustainable Solutions for Materials takes inspiration from Sweden, a country that practices a circular economy or a cradle-to-cradle approach, that involves using products that can be reused completely.
Rex International Gets Oman’s Approval
In December 2019, The Yumna 1 well was drilled to appraise the Yumna oil field. The well tested at a production rate of 11,843 stock tank barrels of oil per day through a one inch choke.
Through the success of the test, on 12th July 2020, the Ministry of Oil and Gas in Oman has approved the Field Development Plan for the Yumna Field and awarded Rex with the Declaration of Commerciality (“DOC”). The DOC will enable Rex’s subsidiary Masirah Oil Ltd (“Masirah Oil”) to fully develop the Yumna Field while continuing to explore the rest of Block 50 Oman.
On 17th July 2020, Rex released an update on their operations in Oman so far. “The Yumna 1 well has so far produced more than one million barrels of oil and is currently producing over 8,000 barrels of oil per day through a 1 inch choke with 440 psig flowing tubing-head pressure.”
With this, we can expect Rex to see a huge increase in revenue and profit for FY2020 and FY2021. I’ve added in a table to show the estimated net profit we can expect to see from operations in Oman if the Yumna field continues to develop further as well as if oil prices increase.
|Production Increase||At $40/bbl||At $43/bbl||At $45/bbl|
|0%||US$31.6 million||US$33.9 million||US$35.5 million|
|5%||US$32.2 million||US$35.7 million||US$37.3 million|
|10%||US$34.8 million||US$37.4 million||US$39.1 million|
|15%||US$36.4 million||US$39.1 million||US$41.0 million|
Note that this table is assuming that the increase in production is based on 8000 barrels/day and, that it starts in August and will continue throughout the year until 31st December (5 Months). The increase in production could start and end earlier/later than assumed. Also, the table assumes that only 65% of the operating revenue is net profit. The above assumptions are very conservative and the real numbers could be way more positive.
Expect More Positive Catalysts Soon
In the first half of 2020, we have already received some great news from Rex which was its subsidiary, Lime Petroleum AS (“LPA”) signing an agreement with Equinor Energy AS (“Equinor”) to acquire 20 per cent interests in each of the licences PL263D and PL263E in the Norwegian Sea. This will allow LPA to participate in the drilling of the Appolonia prospect in the PL263 D/E licence which is located in the prolific Halten Terrace area, near existing infrastructure. There is still potential for more positive catalysts to push Rex’s value higher.
Possible Dividend Policy
Rex International has never given out a dividend in the 7 years it has been listed since its IPO. With the DOC and approved Field Development plan for Yumna Field, Rex might see a huge in-surge in spare cash. Of course they could use this cash for future growth purposes like building a second drill to increase production but they might look into giving out a dividend as a way to reward and bring value to shareholders. As we know, Rex is in a net cash position and has a healthy enough balance sheet to sustain even a 50% payout ratio.
Additional Licenses Awarded To LPA
Similar to the 2 licenses awarded in 1H 2020, there is potential for additional licences being awarded to LPA. If additional licenses are being awarded to LPA, it will definitely positively impact Rex International.
Unlock Value Through Divestment of Shrek Prospect
In June 2019, LPA signed an agreement to acquire 30% interest in PL838 and PB838B in the Norwegian Sea, with exploration well on the Shrek prospect. In August 2019, LPA participated in the drilling of the Shrek prospect. In Oct 2019, Discovery in Shrek was made.
Based on the Qualified Person’s Report (“QPR”) released on 23rd March, the Shrek prospect could have contingent resources of 10-22 million stock tank barrels and 24-50 billion standard cubic feet of Gas. LPA could unlock its value through divestment similar to when they divested the Rolvsnes discovery and its related assets for US$45 million.
The Rolvsnes discovery has a gross estimated resource range of between 14 and 78 million barrels of oil equivalent (MMboe). Since the Shrek prospect has a estimate resource range about 3 times smaller, this divestment could come up to a value of around US$15 million.
Near Term Risks
Of course, with every investment comes risks and Rex International has some that we should take note of.
Oil Prices Staying Depressed
Due to the nature of Rex International’s business, they are exposed to high volatility to due the volatile prices of oil. Oil is very volatile as it is impacted and influenced by many factors such as demand, inter-country politics, etc.
As such, investors who invest in Rex should look past these short term risks and volatility and look at the business itself. Rex International, with their new licenses and the DOC in Oman, will be making way more revenue than FY2019. Their overall revenue and profit might increase by two to three folds even with the depressed oil prices.
Of course, shareholders who are not comfortable with this level of volatility should look away from Rex International.
I view on Rex International is unchanged. In fact, I am very bullish on Rex International after all these positive catalysts being announced. I believe that more and more bank analysts might start covering Rex International in the weeks to come. UOB Kay Hian has already made an analyst report with a “BUY” call and a revised TP of S$0.30, a 11.1% increase from its previous TP.
I still hold my initial position in Rex International from my May buy call at an average price of $0.1165. I’ve since added on more positions at $0.191. I might look into increasing my exposure further if the price continues to show weakness. My TP for Rex International is upwards of S$0.30, similar to UOB. With the additional positive catalysts coming in, this TP will definitely be revised upwards.
As always, you can take a look at my portfolio updates to see my current positions! P.S. I’m running a telegram chat group for you guys to share and discuss investment-related topics so come on in! I’ll be there too! You can join the chat here: https://t.me/+Qe-eykvtbEowNDM1
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