SINGAPORE (Dec 18): Three years after GSS Energy changed its name from Giken Sakata, the company is finally poised to generate revenue from oil, as its name suggests. Thus far, its earnings have come from its historical precision engineering business, which has funded the forays into oil.

On Dec 13, GSS announced it had performed enough tests and amassed sufficient data at its Trembul oilfield in Central Java. With that, the company is ready to start commercial production in various stages this coming year. “We now have a clear roadmap on how we will continue to develop this field and maximise its monetisation,” says group CEO Sydney Yeung in an interview with <i>The Edge Singapore</i>.

GSS also says it is likely to be able to extract both gas and oil.  “At the very beginning, we only expected this to be more of an oil programme. We can now confirm that there’s gas that we can commercialise, which we can take advantage of,” Yeung says.

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To be sure, the oil field is not new. Nearly a century ago, the Dutch had produced from this same field, only to stop when World War II broke out. The 47.6 sq km area holds 24 old wells drilled by Nederlandsche Koloniale Petroleum Maatschappij. The Dutch company drilled only up to 700m deep, and produced from the two layers within that distance from the surface.

Over the past year, GSS reached a lower depth of 1,300m and discovered four more oil and two gas layers. US oil major Exxon Mobil now runs an adjacent field and is pumping from as deep as 3,000m. This suggests that further layers can be discovered as long as GSS is willing to stump up the additional capital expenditure. Indonesian state-owned oil company Pertamina, which gave GSS the 15-year contract to produce from Trembul, has not imposed a cap on how deep GSS can go.

For now, based on what has been analysed at up to 800m, GSS is more than 90% confident that it is sitting on 8.49 billion cu ft of gas and 2.83 million barrels of oil. The company will be spending about US$5 million ($6.7 million) both to drill new wells and revive some of the existing Dutch wells. It aims to produce 200 barrels per day.

Yeung explains that, as GSS carries out more extensive drilling and production, it will have a better idea of how to plan subsequent production, which coincides with the gradual recovery of oil prices. “Let’s generate some revenue first. Then, as we go along, we will expand our drilling. It will be very systematic, and our cash flow, healthy,” he says.

News of GSS’s confirmation of its oil discovery sent the stock up as much as 14.1% on Dec 14, before closing the day at 16.8 cents, up 7.69%. It was at one point the most actively traded counter. Year-to-date, it has nearly doubled. GSS’s net asset value per share stood at 8.57 cents as at Sept 30, up from 8.05 cents as at June 30.

Thus far, GSS’s earnings have basically come from its precision engineering business, which provides tooling, injection moulding and printed circuit board assembly. Its customers are from the consumer electronics, automotive and medical sectors and Yeung aims to diversify this mix further. For the three months to Sept 30, GSS posted earnings of $2.14 million, up 44.7% y-o-y, on the back of a 26.2% increase in revenue to $25.4 million.

The company runs its manufacturing activities in three locations, but it has a much bigger presence in Batam than in China and Singapore, and Yeung will be expanding its space there further. “The whole world is becoming a bit protectionist. Indonesia should and [will] not be an exception. As a result, a lot of products will fall under stricter requirements of higher local content,” he says.

Now, with the oil business starting to generate returns, GSS, as a listed company, might see an eventual restructuring. While GSS was fortunate to have the precision engineering business help fund its oil operations in the previous downturn, the two might soon have to go their separate ways. “These are two very different businesses and it is difficult for analysts and investors to do a proper valuation. And this is one of the reasons I still feel the company is grossly undervalued,” says Yeung, who last bought 1.4 million shares at 17.5 cents each in April 12, bringing his total stake in GSS to 18.28%

He points out that, at current levels, the precision engineering unit is valued at 12 times earnings and 1.8 times book value. The company has scarcely any debt. GSS’s oil reserves, backed by the estimates, have not been taken into account. “Eventually, the right answer is that once revenue kicks in and oil and gas can stand on its own two feet, then the right thing to do is to separate the two. But now, the primary focus is to get the oil and gas business developed and to maximise the potential,” he says.

<strong>Aramco listing, global growth supportive of oil prices</strong>

GSS Energy’s poised production of oil comes at a time when the price of the black gold is at its highest level since mid-2015. On Dec 12, benchmark Brent crude rose above US$65, thanks to the disruption of a pipeline in the North Sea. Even without that catalyst, oil prices have been creeping up to this level from the nadir of just above US$26 per barrel in late 2016. Now, where is oil heading?

From the perspective of group CEO Sydney Yeung, there are a couple of positive catalysts for the coming year. First, Saudi Arabia, the world’s largest producer, is getting ready to list its national oil giant Saudi Arabian Oil Co, popularly known as Aramco.

This IPO is likely to fetch a valuation of more than US$1 trillion ($1.3 trillion), although the Saudi government has put forward a higher figure of US$2 trillion. According to a Dec 14 Bloomberg report, Saudi Arabia has started asking banks to offer their services as bookrunners. Aramco has yet to indicate where the listing will be, but that has not stopped various exchanges — including the Singapore Exchange — from stepping forward. The IPO is part of countrywide economic and political reforms pushed by Saudi Crown Prince Mohammed bin Salman.

To ensure that what will be the world’s largest IPO ever goes successfully, it is in Saudi Arabia’s interest to keep oil prices at a certain level, thereby fetching a higher valuation, says Yeung. To this end, the Saudi Arabia-led grouping of oil producers, the Organization of the Petroleum Exporting Countries (Opec), has kept production curbs in place. This artificial rein on supply, implemented this year, is likely to continue into the new year, he adds. Political reasons aside, oil prices are also likely to enjoy support from healthy global economic growth. GDP forecasts made thus far are still “quite positive”, says Yeung.

He cautions, however, that it is not in the industry’s interest to see oil prices surge above a certain level, lest it seduces producers such as shale oil companies in the US to pump harder than before, upsetting the demand/supply equation. “The sweet spot is probably still the US$55-to-US$70 range,” says Yeung.

Chen Guangzhi, an analyst with Phillip Securities, figures that oil prices this coming year will be between US$60 and US$75. Citing a report by the US Energy Information Administration, the global supply glut has eased to reach an equilibrium in the current 4Q2017 period. Inventory has also come down. In addition, Opec’s concerted production curbs are another positive factor for the market, he says.

On the other hand, Chen sees a healthy world economy as supportive of oil prices. “Infrastructure expansion in China and the US will continue to drive economic growth, which leads to higher demand for oil,” he says. He believes that, in tandem with the rise in oil prices, demand for natural gas will also rise next year as China moves towards gas as a substitute for coal. “We see the upward momentum on the energy sector in 2018,” he says.

Other analysts, such as those from UOB, share this upbeat sentiment, which also applies to other commodity sectors. “The strong recovery in industrial metals and crude oil is well and truly on its way. As 2017 draws to a close, expectations run high that commodities strength will continue into 2018. The on-going synchronised recovery in growth and activity across the world bodes well to ensure that global demand remains strong for both industrial metals and crude oil.”

UOB is cheered by Opec’s ability to whip some “supply discipline” into its members while getting non-members — but significant players, nonetheless, such as Russia — to play ball. In addition, global inventory is being whittled down too. As a result, UOB sees Brent crude hitting US$68 by end-2018.

With oil a political asset as much as a real energy source, analysts from Standard Chartered, who see prices capped at US$65 in 2018, are reminding investors to watch out for possible spanners in the works. For one, the Opec cuts might not hold. “For example, it may be difficult to hold back Russian firms if they feel their market share is being threatened,” say the analysts.

Yet, geopolitics works both ways. “Finally, while geopolitics has not played a very signi-ficant role in 2017, it should not be ignored going into 2018. A number of key geopolitical flashpoints, including Saudi-Iran tensions and their manifestations throughout the region, remain a source of upside risk to our view in 2018,” says Standard Chartered.

Barnabas Gan, an economist at OCBC, cautions that the steady gains made in 2H2017 were fuelled not just by better fundamentals, but also driven by a surge in speculative activity.

He also points to geopolitical risks that might very well disrupt growth momentum if tensions worsen. “Undoubtedly, we have more questions [but the answers are not forthcoming], proving that 2018 can be a somewhat hazy year once again,” he says.

GSS Energy ready to pump oil soon, mulls spin-off of precision engineering business

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