This article first appeared in The Edge Malaysia Weekly on April 10, 2023 - April 16, 2023

JUNIOR oil and gas exploration and production company Reach Energy Bhd, which has a new majority shareholder and recently slipped onto the Practice Note 17 (PN17) list, is looking to dispose of its O&G field in Kazakhstan.

Sources say several suitors are keen to explore the prospects of taking over the concession, which was valued at close to US$300 million in 2016. The concession, called the Emir-Oil LLP, spans six oilfields in an area of 847 sq kilometres.

“The suitors are keen on the asset and aware that more money has to be ploughed in to enhance production. But they feel that oil prices will be able to sustain at above US$70 per barrel and the Reach Energy concession has a low production cost,” says a source.

“Moreover, the current controlling shareholders of the concession, who also control Reach Energy, want to exit the exploration and production of the O&G business. They used to own and operate the oilfield until Reach Energy’s previous shareholders acquired a 60% stake in the concession in 2016.”

Reach Energy did not respond to questions from The Edge on a potential sale of its Kazakhstan oilfield.

Reach Energy’s involvement in the Kazakhstan oilfield can be traced back to March 2016, when it acquired a 60% interest in the concession from Hong Kong-based MIE Holding Corp (MIEH) for US$175.9 million. MIEH kept the remaining 40% and left the operations of the Emir-Oil field to the management of Reach Energy, who are seasoned hands in the O&G industry.

In the transaction, Reach Energy was supposed to pay 85% of US$175.9 million with the remaining amount to be settled on a deferred basis. However, the company could not meet its obligations and owed the sum of US$44.05 million to MIEH, which was to be paid gradually over the years.

The sum with interest accumulated snowballed to US$65.48 million as at the end of last year, resulting in Reach Energy’s gearing exceeding 2.5 times. Subsequently, Reach and MIEH entered into an agreement to convert the debt into equity at the listed company level.

The debt was sold to MIEH’s related company, Super Racer Ltd, which ended up with 48.5% of Reach Energy two weeks ago, following the conversion of the debt to equity. In the exercise, the debt was agreed at US$49.6 million (RM200.5 million), hence reducing Reach Energy’s gearing significantly to 1.08 times.

Following the completion of the exercise, apart from holding 48.5% in Reach Energy, MIEH and related parties control almost 70% of the Emir-Oil concession.

Reach Energy was listed on Bursa Malaysia in August 2014 as a special purpose acquisition company (SPAC). The management completed the acquisition of the Kazakhstan asset in 2016 and saw the company’s status change to a full-fledged junior O&G company.

Since acquiring the asset in 2016, the management of Reach Energy had worked on improving its production. The average daily production improved to 1,911 barrels of oil per day (bpd) in 2021 compared with 1,740bpd in 2020. In the latest results for the fourth quarter of 2022, the average production was 2,774bpd.

However, the company stated that Emir-Oil needs to drill more development wells, perform well workovers and carry out production enhancement initiatives to increase production to improve its bottom line.

Apart from production issues, Reach Energy’s operations in Kazakhstan are also affected by sanctions on oil and gas exports imposed on Russia due to the war in Ukraine. The company said the war resulted in sharp differentials between Emir Oil’s exports and the global benchmark Brent price.

“As a result, the net back from the export sale has reduced significantly, which has given pressure to the revenue and cash flow risk on Emir-Oil. Emir Oil is in the process of exploring new routes and suppliers to mitigate these risks amid the war [raging] on,” Reach Energy had stated in the notes accompanying its fourth-quarter results.

In the unaudited results for the financial year ended December 2022, Reach Energy registered a loss of RM358.1 million on a turnover of RM169.4 million. In 2021, the company incurred a loss of RM82.3 million on revenue of RM150.7 million.

With an accumulated loss of RM394 million, Reach Energy’s shareholder equity dropped to less than 50% of its share capital, triggering the PN17 status, under which it has to regularise its financial position. Its share price dropped by more than 30% following the classification as a PN17 company.

According to sources, the company has since recapitalised following the conversion of the debt owing to MIEH via the issuance of new shares.

“Reach Energy slipped into PN17 status based on the unaudited results for the period ended December 2022. The debt-to-equity exercise was only completed in March this year,” says a source.

If the sale of the Emir-Oil concession materialises, Reach Energy will be a cash company with no assets. However, the amount of cash in the company from the sale of the Kazakstan asset will be far from the 75 sen per share that early investors paid when it was listed as a SPAC.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.