This article first appeared in The Edge Financial Daily on February 26, 2018

KUALA LUMPUR: Reach Energy Bhd, whose losses have been narrowing by the quarter thanks to recent cost rationalisation efforts, is confident it would return to profitability in the current financial year ending Dec 31, 2018 (FY18).

In FY17, the group reported a net loss of RM12.31 million in the third quarter, narrowing from a net loss of RM14.53 million in the second quarter and RM17.76 million in the first quarter. There were no year-on-year comparative figures as the group had changed its financial year end.

The cost rationalisation efforts came after Reach Energy took full control of Emir Oil, an 850.3 sq km onshore oil and gas exploration and production field located in Kazakhstan’s Mangsytau oblast.

The group was a special purpose acquisition company which subsequently graduated into a full-fledged one after making a qualifying acquisition in 2016. It bought a 60% stake in Palaeontol BV, the owner of Emir-Oil, for US$175.9 million. Having secured approval from its shareholders for the buy, Reach Energy then assumed full control in May 2017.

“We are cutting down wastages in the company and streamlining processes — anything from too many staff to redundant activity,” said chief executive officer Shahul Hamid Mohd Ismail. “This has been our focus for the past several months and it’s showing improvement in the financials.”

“We have even managed to trim some of our capital expenditure. This year we will be spending about US$20 million (RM78.4 million),” Shahul Hamid told The Edge Financial Daily.

“I’m also focused on improving logistical costs. The cost of sending our oil to customers is currently handled in multiple ways which erodes margins. Now we have found alternatives which will eliminate margin leakages,” he added.

It, however, remains to be seen whether this would help boost the group’s share price, which has been falling on the back of declining retail investor interest.

The stock closed at 36.5 sen last Friday, down 28 sen or 43.41% from its one-year high of 64.5 sen. At the current level, the group’s market capitalisation is RM400.19 million.

“I really am disappointed that the market does not appreciate the value of our acquisition,” said Shahul Hamid. “It’s (Emir Oil) is a very good asset but somehow the market does not seem to appreciate that.”

The share price has been going downhill since November 2016, after the group secured shareholders’ approval for the acquisition of a 60% stake in Emir-Oil. From 74 sen on Nov 9, 2016, the stock came down to 29 sen on Aug 30, 2017. It recovered later to reach 49 sen on Nov 10, which Shahul Hamid thinks was due to the recent uptick in oil prices.

He is adamant that investors buying into Reach Energy would have to give it time before reaping the rewards and has concurred that its value would therefore not be seen by retail investors.

“This stock is not meant for speculators or short-term investors. It’s meant for those who appreciate the long-term value of the asset. That’s why we have been trying harder to get more institutional investors on board. We have a few, Lembaga Tabung Haji is one of them. We’re trying to get a few more,” he said.

The share price performance had also affected the group’s rights issue plan which was aborted in August, 2017 due to the declining price.

The rights issue — which was intended to raise RM180 million to settle the remaining purchase consideration of the acquisition — will be reconsidered for another time, said Shahul Hamid, adding that the decision will not affect the acquisition, as the group was given the flexibility to settle the payment.

With that, Reach Energy remains focused on its main task of turning around the group.

“I’m a hands-on boss. I’m not really a tie-and-suit CEO (chief executive officer),” said Shahul Hamid. “I know the business and I now know why regulators expect us to be on the ground because there is a lot to do and I do make sure to be present to see the progress.”

Plans for its next acquisition have been accounted for but will not be a focus for the time being, he added.

“We are not looking at any new acquisition at this stage. We want to focus on the current one. I know that no oil company can just live with one asset but we need to take some time to make this asset deliver and then move on. Delivering on the asset would take something like two years,” said Shahul Hamid.

The group has 60 oil wells. Its oil production stands at around 3,000 barrels a day, which it aims to gradually increase past 5,000 this year.

“Last year’s oil production was below 3,000 barrels per day. After we took over, we found a lot of wells had been kept idle for too long due to the oil price scenario, therefore they had dried up. So we have been rejuvenating them and those activities can’t be done overnight,” said Shahul Hamid.