This article first appeared in The Edge Malaysia Weekly on December 4, 2017 - December 10, 2017

INFORMATION technology player Dagang NeXchange Bhd’s move to buy a 30% stake in Ping Petroleum Ltd in June last year could pay off handsomely in the coming quarters with crude oil prices stabilising at about US$60 per barrel, executives familiar with the company tell The Edge.

Ping’s main asset is its 50% equity interest in the Anasuria Cluster located off the east coast of Scotland in the North Sea.

The Edge understands that Ping’s cost to produce oil at Anasuria is as low as US$27 per barrel, in contrast to the current oil price level of US$63 per barrel.

“This means that Ping stands to make great margins, which should creep into DNeX’s bottom line,” a merchant banker familiar with the oil and gas industry says.

Ping — an independent exploration, development and production company that focuses on shallow water offshore development and production in Southeast Asia and the North Sea in the UK — and its partner Hibiscus Petroleum Bhd had acquired the Anasuria Cluster for US$105 million or RM447.143 million cash from units of both Shell and Esso.

The Anasuria Cluster holds 100% equity interest in the Guillemot A field, Teal field and Teal South field, and 38.65% in the Cook field. Also wholly owned by the Anasuria Cluster is the Anasuria floating production storage and offloading vessel or the Anasuria FPSO. An FPSO is an offshore production facility that houses both processing equipment and storage for produced hydrocarbons.

According to DNeX’s announcements when it acquired Ping, based on a valuation report produced by an independent technical and asset valuation unit, as at Jan 1, 2015, the proved and probable (2P) reserves of the Anasuria Cluster were estimated at 40.4 MMstb (million stock tank barrels) of oil reserves and 27.9 Bscf (billion standard cubic feet) of gas reserves.

Basically, DNeX has 15% equity interest in the Anasuria Cluster and, thus, its reserves. “Ping got it right at Anasuria,” an executive with another oil and gas company says.

To recap, DNeX bought into Ping in June last year — having commenced negotiations in September 2015 — and forked out US$10 million or RM42.05 million at the time for a 30% stake.

During the negotiation period, Brent crude averaged US$42.88 per barrel, fluctuating between a low of US$27.88 in January last year and a high of US$53.05 in October 2015.

DNeX also wholly owns OGPC Sdn Bhd, which is a supplier, service provider and contractor in the oil and gas industry, but Ping is likely to be the jewel in the crown of the company in the sector.

DNeX has three core businesses — corporate services, information and communications technology and energy. The bulk of its earnings comes from ICT, which contributed RM34.9 million to profit before tax for the nine months ended Sept 30.

In the nine-month period, DNeX registered a net profit of RM41.92 million on revenue of RM142.43 million. It had cash and bank balances of RM70.87 million while on the other side of the balance sheet, it had long-term borrowings of RM17.5 million and no short-term debt commitments to speak of. Its shareholders’ funds stood at RM429.67 million.

DNeX’s energy division contributed RM11.29 million or 23.4% to profit before tax and RM48.23 million or 30.78% to revenue.

In a report released after DNeX’s financial announcement, CIMB Research says the company’s 9MFY2017 earnings made up only 70% of the full-year forecast. However, it expects stronger earnings in 4Q2017, driven by a bigger contribution from Ping on the back of higher crude oil prices, among others.

“Overall, we project DNeX to record a robust FY2016-FY2019F net profit CAGR of 17%, driven by earnings growth in both its IT service and energy segments,” the report says.

The research house maintains its “add” call and pegs a target price of 74 sen to DNeX based on a sum-of-parts valuation.

According to CIMB’s forecast, DNeX is slated to generate a net profit of RM60.39 million on revenue of RM233 million in its financial year ending Dec 31, 2017. The research house sees the company recording a net profit of RM72.23 million on revenue of RM276.2 million in FY2018.

While its prospects seem bright, DNeX’s share price has not fared well. Since hitting a 52-week high of 69 sen on May 3, the stock has shed about 37% of its value and closed at 41 sen last Thursday, giving DNeX a market capitalisation of RM719.7 million.

DNeX’s largest shareholder is publicly traded Censoft Holdings Bhd, which has a 16.25% stake or 285.06 million shares in the company. Privately held Arcadia Acres Sdn Bhd, the vehicle of DNeX managing director Zainal Abidin Abd Jalil, holds a 13.47% stake in the company while Azman Karim, an executive director, has 11.09% equity interest.

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