RHP overreacts to oil rout, falls 63% in 6 months

While Brent crude fell 44%.

The low crude price today is a result of Saudi Arabia’s desire to maintain its market share as it faces down shale producers in the US.

OSK-DMG reports that RHP has likely overreacted on the oil market rout as it fell 63% in the 6-month period while Brent crude fell 44%.

RHP has received final approval for the Fuyu-1 field, upgrading 2P reserved to c.174mmboe. OSK-DMG believes that the company has the financial capability to develop this field.

The development of the Fuyu-1 will only require USD2m/USD10m in FY14/FY15F, which can easily be covered by existing cash balances, operating cash flow or bank borrowings. Net gearing was only 3.1% as of 3Q14, leaving plenty of debt headroom. Management is confident that bank financing for field development is readily available, meaning RHP does not need to tap equity markets.

Here’s more from OSK-DMG:

The low crude price today is a result of Saudi Arabia’s desire to maintain its market share as it faces down shale producers in the US. Either way, one of the parties will cut production eventually, thereby moving the market back towards supply-demand equilibrium. The current Brent crude price is making deepwater investments uneconomical, which is unsustainable in the long run as global oil demand is still growing at a steady pace.