KrisEnergy sticks to plan despite weaker oil prices

FALLING oil prices may have cast doubt on capital expenditure plans for oil and gas exploration and production firms around the world, but Singapore-listed KrisEnergy is sticking with plans to double production next year.

It is also hopeful of turning in a profit in 2016. "Obviously (the weaker oil price) will lower our projected revenue," said its CEO Keith Cameron.

With break-even costs of US$30-40 a barrel, however, there is a long way to go before its operations become commercially unviable. "Overall we are still looking at becoming profitable in 2016."

The firm widened its loss to US$33.8 million from US$12.2 million a year ago, for the nine months ended September, in spite of higher revenue. This was largely due to increased depreciation and operating and finance costs. But Ebitdax, or earnings before interest, tax, depreciation, amortisation and exploration expenses - a core profitability measure used by upstream oil and gas companies - rose 17.6 per cent to US$26.4 million.

Even while expecting to turn profitable in 2016, the firm emphasises that internally, it is focusing more on increasing its production, reserves and portfolio year on year.

KrisEnergy produced 7,790 barrels of oil equivalent per day (boepd) for the nine months this year, a figure that it expects to increase fourfold by 2017. It also projects that its 2P (proved and probable) reserves would increase from 32.3 million barrels of oil equivalent (mmboe) to just under 100 mmboe in a year.

At the same time, the lower oil prices also means that the company might now be more aggressive in making acquisitions. "There are potentially opportunities out there that we may grab through the oil price being lower," said Mr Cameron. "We'll never stay still and our advantage is that we're very well funded right now."

Brent crude oil prices have fallen some 40 per cent since June, causing oil firms to rethink their plans. Petronas, for one, is cutting capital expenditure for new projects by 15-20 per cent next year.

KrisEnergy expects to spend between US$200 million and US$250 million in capital expenditure for appraisal and development next year. Less than 10 per cent of this is obligated under contracts with government, giving the firm flexibility in spending.

The bulk of these will go towards two offshore Thai fields - Nong Yao field in the G11/48 block and Wassana field in the G10/48 block - where first oil is expected next year, boosting the company's production numbers. The firm also expects to reach a series of final investment decisions next year; its G6/48 and Cambodia Block A assets in the Gulf of Thailand as well as another four gas projects in Indonesia are pending development.

"We're in a perfect position for the future," said director of business development Richard Lorentz.

Hedging

The firm is hedging against the fall in oil price by ensuring that it has a balanced mix of oil and gas, as gas is usually sold through long-term contracts.

Some 65 per cent of its production is in gas and 35 per cent in oil, but the higher sales prices for oil means that the mix of contribution to its revenue is reversed. With the Thai assets mainly producing oil, the mix will swing towards oil next year, while the projects in Indonesia which mainly produce gas will start in 2016-2017. There would therefore be swings in the portfolio mix.

"We'll never get it perfect, but a big part of the portfolio is gas. So that does help mitigate against the oil prices," said Mr Lorentz.

Another way KrisEnergy manages the risk in the price of oil is by spreading its portfolio of assets across production sharing contracts and royalty concessions.

In production sharing contracts, a drop in oil price simply means that the firm can keep more barrels for itself to recover costs, Mr Lorentz explained.

The lower oil prices come at an opportune time for the firm, allowing it to hunt for cheaper assets just as it cut its cost of debt by more than half to just below 5 per cent, compared with 10.5 per cent at the start of this year.

Earlier this year, it started a S$500 million multi-currency medium-term note programme - of which it has issued S$330 million - and a US$100 million revolving credit facility that would fully fund its development programme till 2017.

"We're one of the few (oil and gas) companies in South-east Asia that have aligned our capital structure with the opportunities," said Mr Lorentz.

The firm is now on the lookout for assets with the right technical merits, the right geology and reservoir characteristics, said Mr Cameron. These should also be fiscal regimes that can provide a rate of return of more than 15 per cent.

It is open to either oil or gas investments, but deepwater assets will be one that KrisEnergy intends to steer clear of of. "We have the skillset to do it, but do we want to commit vast sums of money when we have a bigger portfolio on shallow waters?" said Mr Lorentz.

A new pearl

KrisEnergy holds licences for 19 projects in five South- east Asian countries. The firm was founded in 2009 by Mr Cameron, Mr Lorentz and Christopher Gibson-Robinson, its exploration and production director, all founders of Pearl Energy that was previously listed on SGX and sold to Abu Dhabi-listed Aabar Petroleum in 2006, before eventually ending up with Mubadala Development Company, owned by the government of Abu Dhabi.

In running KrisEnergy, the trio are now following the same business strategy as they did for Pearl: by picking the right assets with their deep well of knowledge of South-east Asia geology, and relying on the relationships that have been built up in the past decades.

"We just follow the same basic business plan we have had for the last 14-16 years," said Mr Lorentz.

The firm counts among its major shareholders First Reserve Corporation, a leading private equity firm in the energy industry which holds a 45 per cent stake, and Keppel Corporation with a 31 per cent stake. The management team's experience has distinguished the firm in the industry, and their expertise also enables them to pursue the strategy of farming out its assets.

"The sweet spot for Kris is to leverage the management team's deep South-east Asia experience to de-risk early-stage resources and sell at multiple times the initial investment," said Macquarie analysts Aditya Suresh, James Hubbard, and Candice Chen when they initiated coverage on the firm in August.

Under this strategy, KrisEnergy first performs the technical work required to assess an exploration asset. Once that is done, it invites industry partners to take on part of the interest in the asset, as well as the risk of drilling the exploration wells.

Some of the assets that it is now looking to farm out include its Udan Emas block in onshore West Papua, East Seruway in Sumatra, and Sakti in offshore East Java - those in which it holds at least 95 per cent of working interest. "It's another level of risk mitigation. We don't like to do everything 100 per cent ourselves," said Mr Cameron.

KrisEnergy's shares closed at 71.5 Singapore cents on Friday, 35 per cent lower than the S$1.10 price it listed at in July last year. The stock suffered a steep plunge in January, after it was forced to plug and abandon two wells in Vietnam.

According to Bloomberg data, of the six analysts covering the counter, five have a buy call; they have a consensus 12-month target price of S$1.03.

The weaker oil prices notwithstanding, with the firm potentially at the start of an exponential growth in production, KrisEnergy is now at an inflection point.

Said Mr Lorentz: "These last 12 months have been transformational for us. But the next 12 months with the execution of the developments will be equally pivotal."