The IPO will close on 17 July 12pm.
Before you read further, i have to warn you that i am not an oil & gas expert, I do not know how to value this company nor its oil and gas reserves. What i have written below are based on my layman knowledge and pure gut instinct. I like the upstream segment and has positive vibes on this company and my views are very biased.
KrisEnergy is an independent upstream company focused on the exploration for, and development and production of oil and gas in Southeast Asia. It has 14 contract areas in four countries and is involved in the entire exploration-to-production life cycle.
Use of IPO proceeds
There will be no vendor sale (except during over-allotment) and the proceeds from IPO will be used for the following reasons
30% - acquisitions
55% - capital expenditures
15% - working capital
The financials above showed losses for the last 3 years but frankly we should look beyond the figures because the Company is just starting up and incurring exploration costs to develop its oil and gas fields. A better "non IFRS" financials to use will be the one below.
I will jump straight into the figures that matter most. Let's take a look at the average realized sale price and the revenue and EBITDAX figure. In case you don't know what EBITDAX means, EBITDA = Earnings before interest, tax, depreciation and amortization. X means exploration cost. The EBITDAX for the last three years have been fairly impressive considering that the company was only founded in 2009. The EBITDAX is around US$47m to US$62m.
The EBITAX has hovered consistently around US$60m. It should go up if more production comes on stream as assets become mature.
Frankly, I don't know how to value the reserves. I am no expert but just know that 2P reserves is like "proven at 50%" and 2C is the more risky ones and 1P is the "best" proven reserves.
KrisEnergy is owned by First Reserve and they will still own about 45.2% assuming the over-allotment is exercised. Keppel Corp will own around 31.4% of the Company and Cornerstone will own 5.1% with the balance held by public investors. In 2009, First Reserve backed the management team with $500m of equity. Obviously, they must have done their homework and due diligence on the management team.
Another comfort i have is that Keppel Corporation is paying about $0.91 per share. It is not really too far away from the $1.10 IPO price and will form a 'psychological support'. The cornerstone investors will also be coming in at $1.10 per share, although i don't really have much to talk about the cornerstone investors.
What i really like about the Company
- Experienced and proven team. This team has at least 20 years of experience in the oil and gas industry in Southeast Asia and a proven track record. The founders have worked together since 1997, having established, list and divest Pearl Energy. (See paragraph on "Another Pearl Energy in the making" below.)
- The concessions are widely diversified in Southeast Asia. See picture below. It helps spread out the geo-political risk and the expertise can be reassigned from one area to another depending on the stage in which they are in (exploration or production etc).
- The diversified portfolio allows the company to use the cashflows from the more mature assets to fund the exploration and development of the less mature assets. Oil fields in SEA are still vastly under developed and there is a huge pent up demand should the potential be realized.
- Keppel Corporation is the controlling shareholder. Obviously, Keppel, being one of the largest rig makers in the world, has already done its due diligence on the Company. It's acquisition in KrisEnergy is obviously strategic as it allows Keppel to move up the value chain to upstream. Having a strong parent in Keppel bodes well for the firm. Keppel recently exercised its call option to buy another 16% in the company. The news is here. In total, Keppel will own 31% of the Company post listing.
- First Reserve is a big PE firm specializing in this sector, having backed many successful companies and is one of the best in this space.
- One and only listed company that is in this space listed on SGX.
- Exploration is a high risk high reward game. The Company may not "hit" pay dirt after exploration and all the costs may go to waste.
- The Company will need all the cash it needs to develop the oil fields and will not be able to pay dividends for many years.
- The current NAV per share (adjusted for IPO proceeds and shares) is around $0.58 (versus the $1.10 share price). Are we paying too high a valuation for future "unknown" earnings?
- CEO is pretty advanced in age at 66 years old.
- First Reserve may want to cash out in the next few years and sell down its shares.
Another Pearl Energy in the making?
If you have been watching the market for as long as i had, you will remember a similar company listed in Singapore called Pearl Energy. Pearl Energy was listed in April 2005 at $0.70, very well received and debuts above 90c on the first day. It was delisted in March 2006 at $1.95 and the news is here. This is also reflected in the prospectus and it is the same team which we will be 'backing'.
Mr IPO's views
I don't have a fair value for you as i don't know how to compute one. Most similar E&P companies listed in US are loss making as well but their share price will shoot up whenever they discover a huge proven reserves. This investment is not suitable for everyone and in my view is pretty high risk. However, there are several mitigating factors such as a strong controlling shareholder buying in at 91 cents, a proven management team and one and only E&P company listed on SGX. In this regard, i will give it a 3 chilli rating (based purely on gut feel). Will it be Déjà vu one more time on debut?
I will try to find out more about the demand for institutional shares next week and will post it in my comments section. Check back here if you want the latest updates and whether Mr. IPO will apply for the shares.