Nickel, iron ore and oil all dropped, and shares of resources companies slipped in Asia.
PETALING JAYA: The rising oil price has worked in favour of Reach Energy Bhd
which needs to raise about RM180mil to ramp up production of at its oil and gas fields in Kazakstan.
Reach, which aborted a proposed share placement in May this year, is seen as among the better stocks in the oil and gas sector because of its financing plans that does not pose a dilutive threat to existing shareholders.
“However the fall back for Reach at the moment is it is still not profitable and not generating enough cash-flow from operations. The production must be ramped,” said an investment banker.
Brent crude has gone above US$60 per barrel, prompting some analyst research houses such as Bank of America Merill Lynch forecasting a US$75 per barrel price target for crude. However, there are also a large majority of analysts who feel that US$55 per barrel would be the average over the whole year.
On Bursa, there is a mixed bag of investor reception towards stocks. While Reach Energy has seen its share price rise, others such as Hibiscus Petroleum Bhd, UMW Oil and Gas Corp Bhd and Sapura Energy Bhd have not seen any investor euphoria.
An analyst said that the benefits of the rising oil price will only flow down to service providers such as Sapura Energy and UMW O&G later stages if the uptrend continues.
“For now the industry still has surplus capacity and the lease rates for the assets they own are still low,” said an analyst.
He said the immediate beneficiaries of the rise in oil price are those companies with exposure to the upstream activities. Such companies are Reach Energy and Hibiscus.
“Between the two Hibiscus is more profitable and is showing cash-flow from operations while Reach is still not strong in its operations. However Reach has just started working on its oil fields in Kazakstan.
“And the company does not plan to issue shares to fund its capital expansion. So there is little threat for dilution,” said the analyst.
Hibiscus, after writing off its investments in Lime Petroleum and Hirex, is cash-flow positive because of contribution from its oil field in Anasuria Cluster, located in the North Sea. The company’s share price has gone up significant this year and it has undertaken a placement to raise funds.
As for Reach Energy, according to the noted accompany its latest quarterly results, the company plans to ramp up production to 5,000 barrels per day in the near term and increase it to 12,000 bps by 2019.
Reach Energy’s has liabilities of RM627mil owing to a corporate shareholder which is bogging down their finances. Of the amount less than 12% is interest free while the rest have a financing charge to it.
“So it is important for the company to secure financing and ramp up production as soon as possible,” said the analyst.
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