Pearl produces a gem of an IPO

The first pure play independent Southeast Asian regional oil and gas exploration and production company gets listed in Singapore.

After months of close scrutiny by the MAS and SGX, the institutional portion of the 110.9 million share offering for Singapore Pearl Energy priced on Monday in the top half of its range. The 25% block of new shares was sold at S$0.70, against an indicative pricing range of S0.60 - S$0.75.

The deal gives the company a market cap of S$311 million ($188 million) and an IPO size of S$77.6 million ($46.9 million). CLSA was lead manager for the deal. 5% of the total will be offered to the public from today. There is no greenshoe.

Pre IPO the company was 65% owned by the Tahija family in Indonesia, 16% by Itochu of Japan, 11% by the management and 8% by private equity group 3i. All the original investors have been diluted down by 25%. All are subject to a six-month lock up but are free to sell their shares after one year.

The company was founded just three years ago by senior managers at Gulf Indonesia Resources Limited, a company that listed in October 1997 with the ticker GIRL. The success of that IPO gave the senior managers, including Keith Cameron, CEO, Chris Gibson-Robinson and Richard Lorentz, the idea that a Southeast Asian E&P company could work. Having decided to headquarter in Singapore in 2000, they made their first acquisition in January 2002.

Pearl now has nine operations in Indonesia, Thailand, and the Philippines. According to the prospectus of the IPO, the company has over 33,000 sq km of exploration acreage, comprising nine exploration areas, of which three are currently producing. Pearl has 2P reserves of 27.64 million barrels of oil, according to certifiers NSAI, as well 386 billion cubic feet of contingent gas resources. It is also exploring opportunities in Vietnam, Malaysia and Brunei.

The company will use one third of the proceeds from the IPO to make further acquisitions of blocks from the major oil companies that are divesting out of Southeast Asia. It will use another third to boost exploration at its current sites. The final third will be used to pay back shareholder loans.

The decision to list in Singapore would have caused some headaches. Firstly there are no comparables listed in Singapore, which meant that the authorities and local investors had to spend a long time getting used to the accounting and other issues that surround exploration and production companies. On top of this, the deal was brought to the regulators attention just when the China Aviation Oil scandal was blowing up and so the authorities had to be extra thorough in their assessment. It is understood that they even brought in their own outside consultants to help with the analysis of the company.

The deal ended up being seven times subscribed, with two thirds of the demand from Asian and one third from Europe. The deal was Reg S and so not sold to US accounts. 60 institutions came into the final book.

In terms of valuation, due to accounting rules, all exploration expenses need to be written off, which thus means that the company has a PE of 165 times 2005 prospective earnings. However, on the basis of operating profit before changes in working capital the company has an enterprise value multiple of 2.5 times cashflow. The prospectus forecasts are based on oil price assumptions of $31 oil for 2005 and $30 oil for 2006.

The company does not publish an NPV but sources suggest that the company should be valued at a premium to the NPV of its currently producing and near-term producing assets, to reflect its substantial exploration upside and considerable reserves of gas. Other independent oil and gas companies that have high exploration investments such as Paladin and Santos, trade at a 15% premium to their NPV.

For Pearl, it is understood that with such low oil price predictions, the value of the IPO came out as flat to NPV. However if you use the current spot price of almost $60 a barrel, then the deal was priced at a significant premium to its NPV.

The deal will attract some attention as it marks a change in the dynamics of financing regional oil and gas companies. Traditionally, the sector has been dominated by the huge multinationals that had no need of visiting the local markets to finance their local operations. The other main group of players have been the government owned majors in each country, which have had easy avenues for finance.

However, many of the majors are looking to leave the region and in their place smaller regional independents are coming through, Companies such as Medco Energi and Energi Mega Prasada in Indonesia form with Pearl a new breed of hungry E&P companies that are looking to use the regional capital markets to finance acquisitions and growth. Indeed the decision by Pearl to list in Singapore as opposed to Indonesia, Australia or the AIM market in London, is that long term, it is likely to provide a more dependable stream of finance for Pearl as it looks to buy blocks from the majors.

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