Asset-seeking KrisEnergy finds valuations rich

Upstream oil and gas company KrisEnergy prefers to seek out its assets rather than participate in auctions.

When oil and gas exploration and production company KrisEnergy scouts the horizon in Southeast Asia for acquisitions, among the key challenges the young company faces are the rich valuations in the region.

According to Richard Lorentz, a co-founder and director business development of Singapore-listed KrisEnergy, there is a propensity among bidders to overpay when investment banks run an auction process.

A case in point is US company Newfield Exploration's sale of its Malaysian assets last year, Lorentz told FinanceAsia in a recent phone interview. Malaysian company SapuraKencana Petroleum bought the assets for $898 million.

“We have pretty ruthless standards when it comes to the exploration upside and the amount we are prepared to pay,” Lorentz said. “To give you an example, Goldman Sachs just ran a process for Newfield in Malaysia. A company bought it for a little under $900, which was twice what the management [of the vendor] thought they would go for,” he added.

Lorentz, a petroleum geologist, founded KrisEnergy with Keith Cameron and Chris Gibson-Robinson in 2009, with the financial backing of private equity firm First Reserve Management.

To avoid the keen competition seen in auctions, KrisEnergy prefers to directly approach companies that have assets that do not fit into their portfolio.

“What we do well is, because we are on the ground and have such a huge network of relationships, is to proactively go to people who own assets and ask them if they want to sell assets, mainly because we can look at their portfolio and say 'well this doesn’t fit',” Lorentz said, adding that the company currently is looking at two such situations.

KrisEnergy has also expanded its portfolio by applying for and acquiring exploration licences, as it did with a Sakti exploration block in offshore East Java.

The company has occasionally even won a bid despite not being the highest bidder, as happened last year when it bought a 30% stake in a gas field in block 9, Bangladesh, from Tullow Oil plc. It added another block in Bangladesh on Wednesday.

"We were the second-highest bidder," Keith Cameron, CEO of KrisEnergy said, referring to the company's acquisition from Tullow. "We thought we lost it and then Tullow decided that for various reasons -- mostly because they wanted a happy staff -- they came back and said, 'okay we will sell it to you for a lower amount as long as you look after our people'. It’s those relationships that we have built up that enable us to do that."

High risk, high reward

KrisEnergy was the first company to list under new Singapore regulations that allow unprofitable companies in the oil and gas and mining sectors to go public, inviting investors put their faith in the founders' track record.

The founders - Lorentz, Cameron and Gibson-Robinson - first got together in Indonesia and have extensive relationships in Southeast Asia and a track record of creating value. Together they founded and listed Pearl Energy in 2005 with a market cap of $240 million and over the ensuing three years more than tripled its value. Pearl was acquired by Aabar Petroleum for more than $500 million in 2006 and subsequently bought by Mubadala for $833 million in 2008.

"This is an early-stage exploration and production company," said one oil and gas analyst at a bank, who declined to be named. "It is the third time this group of people have gotten together to start a business and the other two ventures were extraordinarily successful in what is a risky business," he said.

The company's exploration portfolio is high-risk but potentially high reward, which has been reflected in the share price's volatile performance. KrisEnergy stock traded at S$0.72 on March 12, well below its initial public offering price of S$1.10. Its stock sold off sharply earlier this year due to disappointing test results for two wells in its Vietnam blocks, which analysts say hold a significant portion of the company's exploration upside.

According to Lorentz, the blocks still have "a tremendous amount of potential." Some analysts also are not writing off the potential from its Vietnam blocks but the stock has taken a beating. It recently posted a $12.6 million loss after tax for its 2013 financial year.

"Their Vietnam wells were disappointing but they don't eliminate the potential for them to realise value from that acreage," the analyst who declined to be named said, whilst noting some key assets that the company is developing in Thailand.

KrisEnergy mitigates some of the risk by finding industry partners to bear the cost of exploration, essentially farming out exploration projects, as it did by partnering with Italian oil and gas company Eni for the Vietnam blocks.

It also has a mix of production projects and exploration projects.

According to Kiran Raj, the CFO, KrisEnergy's capital expenditure for this year will be $196 million, with 90% to be spent in Thailand and Indonesia.

The company redeemed its $120 million 10.5% senior guaranteed bonds in January due to the restrictive terms of the notes, which Raj pithily described in this fashion: "We couldn't even sneeze without going to bondholders for approval."

The company is seeking to raise debt at better terms. "We are debt-free now but we won't remain that way for long. We are in the process of putting in place a revolving credit facility," Raj said.

KrisEnergy has a portfolio of assets in Bangladesh, Cambodia, Indonesia, Thailand and Vietnam and focuses on the exploration, development and production of oil and gas in Southeast Asia.

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