This article first appeared in The Edge Financial Daily on October 10, 2018
Reach Energy Bhd
(Oct 9, 45.5 sen)
Maintain hold with a higher target price (TP) of 41 sen: Reach announced the Kariman #16 (K-16) vertical exploration well had been spuded on Saturday, targeting an identified highly graded hydrocarbon trap in close proximity to the west flank of Kariman field. The total drilling duration is expected to be 120 days, undertaken by local and international service providers such as Sinopec, AsiaPetroService, Drill-Lab Kazakhstan and KazPromGeofizika.
This is unsurprising to us as it is part of Reach’s US$9 million (RM37.44 million) financial year 2018 (FY18) non-discretionary capital expenditure programme. Apart from this, another exploration well, West Kariman-1, located to test a significant structure in line with some prolific wells to the south of the Emir oil block, has also been identified for drilling this year. The drilling cost is only payable to the service provider 18 months later.
We understand K-16 has a high chance of success since it is near the producing field. We understand the success of this exploration well could potentially increase the Emir-Oil asset’s 2P (proved and probable) reserves (100% gross) to exceed 100 million barrels of oil equivalent (mmboe) from the current level of 81 mmboe if they are able to identify further hydrocarbon resources. We believe the further development cost to monetise K-16 may not be substantial given its close proximity to existing infrastructure.
Its producing asset in Kazakhstan, Emir-Oil LLP, had recently obtained authority approval to commence trial production period (TPP) of the North Kariman (NK) field for 15 months, from Oct 1, 2018 to Dec 31, 2019. The TPP approval allows Emir-Oil to put the NK wells on production and pursue a new production contract for the NK field.
Overall, we are positive on the operational improvement in the second half of FY18 and FY19 with higher production but future growth beyond that is capped unless external funding is secured. — Hong Leong Investment Bank Research, Oct 9