Roadshows begin on Friday for a S$248 million to S$276.3 million ($200 million to $222.8 million) initial public offering by Indonesian oil and gas producer Samudra Energy.
If the listing is successful, the company will become Southeast Asia's largest energy group by assets on the Singapore Stock Exchange.
The prospective Singapore listing consists of 131.1 million shares, with up to 90 million shares on offer to institutions and retail investors, plus a further offering of up to 45.1 million to four cornerstone investors.
These four comprise: Caprice Capital International (the private equity arm of former Hong Leong executive Paul Poh who has invested in a number of offshore oil and gas players), Hong Leong subsidiary GuoLine Capital, fund manager OCP Asia and Sky Trinity Investments (a subsidiary of Hutchison Whampoa, whose Canadian offshoot, Husky Energy, is one of Samudra’s development partners).
In total, the company is offering 43% of its enlarged share capital if a greenshoe of 19.7 million shares is exercised, according to a term sheet seen by FinanceAsia. The deal is entirely made up of primary shares, with the controlling shareholders all subject to various lock-ups.
Pre-IPO, private equity firm Northstar Samudra has a 46.8% stake and will be subject to a 100% lock-up for the first six months and a further 50% lock up for the second six months post listing. Both its managing partner, Ashish Jaiprakash Shashtry, as well as Caelus Energy, which holds an 11.1% stake, will be subject to a 100% one- year lock up, while the company itself will be under a 100% six month lock-up. The other major shareholder is the Kerry Group, which owns 21.9% through Dignitary Holdings.
Proceeds from the current IPO are being used to re-pay a term loan and settle lender warrants as the group’s borrowing costs are one reason why it has not yet turned a profit.
Roadshows continue to Hong Kong on Monday and will wrap up in Boston on August 5. The Singapore public offering will run from August 8 to 12, with listing scheduled for August 14.
Joint bookrunners are CIMB, Credit Suisse and Nomura.
Valuation
Samudra is pitching its deal at S$1.89 to S$2.11 per share, which equates to a syndicate valuation of roughly $11.3 to $12.4 on an EV/2P basis pro forma post money basis ($8.3 to $8.9 pre money).
Samudra’s nearest comparable is Singapore-listed Kris Energy, which has slightly less proven reserves of 32 million barrels of oil equivalent (mmboe) compared to Samudra’s 49 mmboe (or 54.2 mmboe after a final regulatory sign-off) , but more contingent reserves of 53.9 mmboe compared to Samudra’s 33.9 mmboe.
Kris Energy’s initial focus has been in Thailand but its future development projects are in Indonesia. Year-to-date the stock is down 37.7% after suffering a steep drop in January and is trading at $17.5 on an EV/2P basis.
Junior exploration and production (E&P) stocks can be extremely volatile as a company’s prospects are often binary – if there is a discovery the stock shoots up and if there is not, then it sinks down again. RH Petrogas, another SGX-listed junior E&P company for example, is up 36.2% year-to-date after recording a big jump in mid-May.
About two thirds of the company’s assets are in Indonesia and it is trading on a very steep EV/2P ratio of about $45. This appears to be because investors believe it will soon be able to upgrade its contingent reserves of 70 mmboe to proven (11.9 mmboe).
On an EV/2P +2C basis (which factors in both 2P proven and probable reserves and 2C contingent reserves) the stock is, therefore, much cheaper at about $6.5. This is in line with Kris Energy on $6.3 and Samudra’s roughly $6.9 to $7.6 range pro forma post money ($5.1 to $5.4 pre money).
More established Indonesian E&P players such as PT Medco Energi operate older fields and trade on much lower EV/2P multiples. PT Medco is currently valued at $5.3 EV/2P although analysts believe this could cheapen to $5 once its Senoro gas project comes online early in 2015.
Anticipating this, investors have already pushed the stock up 66.6% year-to-date.
Further afield, junior E&P operators in Europe’s North Sea average EV/2P multiples of about $16. Premier Oil, for example, is currently valued at $17.4.
The Jokowi effect
The Jakarta Composite Index has had a strong and steady run so far this year and is up 19.2% year-to-date. Investors will now be watching closely to see what effect the results of the Presidential election have on the market.
Samudra will be one of the first deals to benefit from any positive tailwinds and it is also coming to the market on the back of a run of well-received US E&P deals. IPOs for Rice Energy, Viper Energy and Memorial Resource Development have all jumped 23% to 31% since listing over the past couple of months.
One fund manager who is thinking of buying Samudra told FinanceAsia, “I like this deal because the valuation is reasonable, the management have a lot of experience and it should have good momentum behind it. The deal size means Singaporean tracker funds will need to own it.”
Indonesia’s E&P sector
Samudra’s strategy and current asset base mirror the overall health and direction of Indonesia’s E&P sector. Both presidential candidates talked a great deal about energy security during the election campaign.
This is not very surprising given that the country’s energy needs are rising at a time when its oil output is contracting. Where once Indonesia was a leading OPEC member, the country has been a net oil importer since 2004.
Since then, oil production has declined by a CAGR of 3.4% to 840 mbopd, while net imports have soared by a CAGR of 18%. In order to bridge the shortfall, there has been a concerted switch from oil to gas and from older oil fields in the Sumatran Basin to under explored areas in East Kalimantan.
But as a Wood Mackenzie report makes clear, this change in strategy has been fraught with difficulties. Since 2007, the government has awarded an average of 30 blocks per year.
Yet as the energy specialist comments, “So far, no major success stories have emerged, as the average size of hydrocarbon discoveries in Indonesia has remained low since 2000.”
It also highlights the difficulties of operating in a country where the terrain is often extremely harsh (dense jungle) and the infrastructure is frequently lacking, particularly for gas, much of which is consequently exported.
Samudra’s fundamentals
Samudra has three assets in production, one in development and four at the exploratory stage. Its three production assets are all in South Sumatra (Meruap KSO, Pilona TAC and Uno Dos Rayu KSO) and are producing oil.
In its prospectus, the company highlights its efficiency in being able to bring its Uno Dos Rayu field into production only 11 months after making its first discovery there in 2012.
The major development project is its Madura Strait PSC project in East Java, where it has a 20% stake alongside CNOOC’s 40% and Husky Energy’s 40%. The weighting investors give this project’s prospects in their fundamental evaluation is likely to be one of the key determinants whether it prices at the top or the bottom of the range.
First production is expected to come online in 2016 and the company says it will not have to spend much capex to deliver gas as Pertamina’s East Java gas pipeline is already in place. So far there have been seven gas discoveries and two POD applications have been submitted.
However, over the longer-term the company says the project has 156.8 mm boe in prospective resources, which are not yet part of its 2C reserves.
Its other major long-term project is its South Bengara II PSC development in East Kalimantan, which is still at the exploratory stage and has prospective resources of 186.03 mm boe.
If this and its three other exploratory projects are pulled off, the company hopes to increase its daily working interest share of production from 2,409 bopd as of March 2014 to 20,904 bopd by 2018. And there will be clear shift to gas from oil in the mix, with the former accounting for three quarters and the latter one quarter.
Another selling point is Samudra’s IOR (Improved Oil Recovery) and EOR (Enhanced Oil Recovery) expertise. Syndicate analysts believe this is what sets the company apart from other junior E&P players.
By extracting greater value, Samudra is able to extend the life of Indonesia’s ageing oil fields. Production at its Meruap field has doubled over the past five years using such techniques.
During its roadshows the company is also likely to argue that it offers lower risk exposure to the E&P sector because it does not focus on exploratory drilling, which involves high capex, but acquiring underperforming assets, which it can improve via IOR and EOR.
In its prospectus, Samudra says it has acquired five assets and three licenses since it was established in 2005, but reviewed 50 acquisition opportunities over the same period.
One risk factor investors will focus on is the company’s current loss making status. Analysts do not believe the company will turn a profit for the next three years because of amortisation and interest expenses on its debt.
For the 2013 financial year, the company reported revenues of $54.2 million, Ebitda of $13 million and a net loss of $33.6 million. Current forecasts suggest that while revenues will climb to $90 million by 2015 and Ebitda to $27 million, the net loss will widen to $102 million.
