Keppel ups support for KrisEnergy on eve of IPO launch

Upstream oil and gas company KrisEnergy will open the order books for a Singapore IPO of up to $215 million after Keppel increases its stake and agrees to participate in the $80 million cornerstone tranche.
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KrisEnergy headquarters at Shell House in Singapore
<div style="text-align: left;"> KrisEnergy headquarters at Shell House in Singapore </div>

Oil and gas exploration and production company KrisEnergy will kick off the management roadshow today for a Singapore initial public offering of up to S$270.8 million ($215 million).

The deal comes after regional markets showed signs of stabilising last week following five weeks of pretty relentless selling. The Singapore market fell another 0.3% yesterday and is still down 0.8% year-to-date, but the slight recovery last week may have helped convince the issuer to go ahead.

The company has also secured the support of Keppel Corp, one of Singapore’s top bluechips, ahead of the IPO, which ought to make other potential investors more comfortable about its prospects – both in terms of getting the deal out the door and when it comes to expanding and developing its reserves.

As an upstream company with only a small level of production at this point, there are obviously a lot of execution risks. KrisEnergy will also be the first company to list under new Singapore regulations that allows unprofitable companies in the oil and gas and mining sectors to list, making it a test of the domestic demand for such assets. The regulations, which have been worked out simultaneously with KrisEnergy’s listing application, are similar to the Chapter 18 rules in Hong Kong and will bring Singapore in line with other major listing destinations such as Australia, London and China.

Temasek-controlled Keppel, which is mainly involved in property, infrastructure and the design and construction of rigs and specialised ships, bought a 20% stake in KrisEnergy for $115 million in July last year and yesterday said that it had exercised a call option to buy an additional 16% from the controlling shareholder. That investment is not part of the IPO, but will be done at the IPO price following a re-negotiation of the earlier agreed exercise price.

However, if the certain conditions are met after the listing, Keppel will pay the seller the difference between the initial exercise price of $7.6667 (approximately S$9.66) per share and the IPO price, it said in an announcement published on the Singapore Exchange website yesterday. The certain conditions weren’t specified, but if this earn-out mechanism is triggered, the maximum cost of exercising the call option will be about $122.7 million, it said.

On top of that, Keppel has also agreed to participate in the IPO itself as a cornerstone investor and has committed to take up $35 million worth of the shares on offer. According to the listing prospectus, there will be two other cornerstone investors – the Capital International group and Palang Sophon, a family-owned Thai investment company whose interests in the oil and gas sector include two of the producing oil fields owned by KrisEnergy.

The individual commitment of the other two weren’t disclosed, but a source said the total size of the cornerstone tranche will be about $80 million, or 37% to 40% of the total deal size. As with all Singapore IPOs, there is no lock-up for the cornerstones.

Deal terms
Singapore-based KrisEnergy is offering a total of 246.154 million new shares through the IPO, which will account for 23.5% of the enlarged share capital. Some 55.9%, or 137.552 million shares, will be targeted at international institutions, while 6.2%, or 15.283 million shares, will be set aside for retail investors in Singapore. A smaller portion of the retail tranche will also be offered to company employees.

The shares will be marketed in a range between S$1.02 and S$1.10, which suggests a base deal size between $199 million and $215 million. There is also a greenshoe of all secondary shares, which will account for 12.4% of the total deal size, or 20% if you exclude the cornerstone tranche.

The institutional bookbuilding will continue until July 11 and the final price is expected to be determined the following day. The trading debut is scheduled for July 19.

Given that KrisEnergy isn’t expected to become profitable at the bottom line until 2015, according to one source, it is valued primarily on a discounted cash flow basis. The price range indicates a market capitalisation of between $850 million and $915 million, which is an increase from the $585 million valuation implied by Keppel’s initial investment last year, even after adjusting for the IPO proceeds.

Company background
KrisEnergy was set up in 2009 by Keith Cameron, Richard Lorentz and Chris Gibson-Robinson with the financial backing of private equity firm First Reserve Management. The same guys had earlier founded and built Pearl Energy, another Southeast Asian oil and gas explorer, which they took public in 2005. That company was taken over by Aabar Petroleum in 2006 and then acquired and delisted by Abu Dhabi investment company Mubadala Development Corp in 2008, by which time it had already made quite a lot of money for its shareholders.

In return for a controlling equity stake, First Reserve made a financial commitment of $500 million to KrisEnergy, of which $301 million have been drawn down. After the IPO and its most recent sale of a 16% stake to Keppel, First Reserve will own 48.3% of KrisEnergy, while Keppel will hold 31.6% and public shareholders 19.4%. The management will own the remaining 0.7%, although they also have significant incentive packages linked to KrisEnergy’s share price, which means their interest is well aligned with that of other shareholders.

The business strategy is to acquire upstream assets in countries and basins where the founders and technical team have extensive knowledge and experience, and to become the employer of choice and preferred partner for governments and other upstream companies.

The business
The company currently has a portfolio of assets in 14 contract areas in four countries (Thailand, Indonesia, Vietnam and China) and has signed agreements to buy two additional projects in Bangladesh and the Gulf of Thailand subject to government approvals. Its assets range from exploration and appraisal to development and production. In other words, they are active across the entire E&P value chain. Its level of interest in each of these assets ranges from 23.75% to 100%.

Its partners include both large-scale national oil companies and international players such as Chevron, Eni, PTT Exploration and Production, Mitsui Oil Exploration and Mubadala.

Three of its existing assets and the pending one in Bangladesh include fields that are already producing oil and gas. However, it intends to sell one of these, located offshore North Sumatra, shortly after the IPO. Including the Bangladesh field, the company would have had a proforma average working interest production of 7,275 barrels of oil equivalent per day in the first quarter this year. The producing contract areas provide a stable cash flow and a solid foundation which the company can leverage to pursue its exploration and development activities, it said in the prospectus.

According to a qualified person’s report that is cited in the prospectus, KrisEnergy had certified proved and probable working interest reserves (known as 2P reserves) of 17.16 million barrels of oil equivalent (mmboe) at the end of 2012, or 31.7 mmboe assuming the acquisition of the TBL asset in Bangladesh is completed.

Its certified best estimate working interest contingent resources (known as 2C resources), amounted to 40.72 mmboe at the same time, while its certified working interest of unrisked prospective resources were estimated at 1,469.6 mmboe.

All of its contract areas hold exploration prospects, and a key part of the company’s strategy, it says, is to exploit the potential of its prospective resources over the coming years. It expects to participate in the drilling of up to five exploration wells in 2013 and up to 13 exploration wells in 2014. Since it was founded four years ago, it has been a party to 26 exploration wells, of which 17 have encountered oil and/or gas, and it is currently moving ahead with the development of three oil fields and the appraisal of three gas discoveries for near-term development.

One of the key strengths listed in the prospectus is the management team, which has a lot of experience in managing a listed exploration and production company. The team also has a “proven track record of increasing production and reserves by exploration and discovery, and of bringing development assets…into production efficiently and in a cost effective manner.”

The majority of the management and technical staff have worked together since 1997, initially in a company called Gulf Indonesia Resources and then in Pearl Energy.

In 2012, KrisEnergy posted an Ebitda of $35.0 million, which was down from $51.8 million in 2011. However, this wasn’t enough to cover the expenses and the net loss amounted to $17.7 million last year. That was an improvement from the previous year’s loss of $34.2 million though.

Bank of America Merrill Lynch and CLSA are joint global coordinators and bookrunners for the IPO.

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