IPO: O&G outfit Reservoir Link confident of well services business viability

The Edge Markets, By Adam Aziz – 25 June 2020

“Even if oil prices fluctuate, our job continues, including during the end-cycle of the wells.” — Thien Chiet Chai, Reservoir Link executive director.

KUALA LUMPUR (June 25): Listing an oil and gas (O&G) outfit during this highly uncertain environment, with oil prices skirting record lows just recently, probably sounds like a baffling proposition to many.

But well services expert Reservoir Link Energy Bhd, which is slated to debut on Bursa Malaysia’s ACE Market on July 15, is confident that its business prospects in the medium term warrants further investment for expansion.

“We follow the market, and based on our intelligence, the market is there for well services,” said Reservoir Link chief executive officer-cum-managing director Datuk Wan Hassan Mohd Jamil after the company’s prospectus launch today.

And while Petroliam Nasional Bhd (Petronas) is cutting down on its capital expenditure, to date none of its production contracts has been cancelled, Reservoir Link executive director Thien Chiet Chai noted. “Even if oil prices fluctuate, our job continues, including during the end-cycle of the wells. Our outlook is still pretty positive overall,” Thien said.

Reservoir Link’s core expertise lies in perforation, wash and cement (PWC) – a service required throughout an oil well’s life cycle – which contributed around RM43 million or 53% of its revenue in the financial year ended Dec 31, 2019 (FY19).

The group is also involved in well testing service, which contributed RM14 million or 17.5% of Reservoir Link’s FY19 revenue.

The group wants to raise RM23.42 million from its listing, of which RM10 million will be used to part-acquire well-testing equipment. Having its own equipment would help improve margins, it said.

It is also involved in well leak repair, wireline services and production enhancement services, with clients in Malaysia, Vietnam and Mauritania.

While its FY19 revenue came mostly from Malaysia, Reservoir Link’s prospectus showed there is potential demand for PWC services from its client in the Mauritanian market, which was hit by value-chain disruption due to Covid-19.

Interesting potential shareholders

Reservoir Link’s July debut marks the first listing of an energy company in Malaysia since 2017, when Serba Dinamik Holdings Bhd raised RM407 million in its initial public offering.

It is also the third ACE Market listing this year after electrical product manufacturers Powerwell Holdings Bhd and ACO Group Bhd.

Incorporated in Sarawak in 2008, Reservoir Link counts Sarawak-based engineering solutions provider Pansar Bhd – whose chairman Datuk James Tai is also Reservoir Link’s chairman – among its shareholders, with a 20% stake.

Its IPO is now attracting some prominent names as potential shareholders, including Serba Dinamik co-founder Datuk Awang Daud Awang Putra who was seen at the prospectus launch and has expressed intention to take up a stake in Reservoir Link.

Also sighted during the launch was businessman Datuk Seri Chiau Being Teik, the controlling shareholder of Chin Hin Group Bhd.

Pre-IPO, the group’s largest shareholder with a 46.08% stake is RL Holdings Sdn Bhd — the private vehicle of Wan Hassan (50%), Thien (5%), and Reservoir Link operations director Mad Haimi Abu Hassan (45%).

Reservoir Link’s IPO involves the public issue of up to 57.13 million new shares, representing 20.04% of the enlarged share capital of 285 million shares, at 41 sen apiece.

There is also an offer for sale of 31 million shares or 10.88% of Reservoir Link’s enlarged share capital by Pansar. Thien, Wan Hassan and Mad Haimi are also offering some of their direct stakes up for sale.

Post-IPO, RL Holdings’s stake will be lowered to 36.84%, while Pansar’s will be trimmed to 10.39%. Thien’s direct 21.1% stake will be trimmed to 13.38%, Wan Hassan’s 8.16% to 5.18% and Mad Haimi’s 2.66% to 1.69%.

Can Reservoir Link keep the growth momentum?

Loss making in FY16, the group managed to turn around with a net profit of RM1.02 million in FY17. It then continued to grow its bottom line with a compounded annual growth rate of 209% over the subsequent two years.

Reservoir Link’s profit after tax (PAT) for FY19 stood at RM9.68 million on revenue of RM80.03 million with a PAT margin of 12.09%. As at end-2019, the group has a healthy gearing ratio of 0.37 times and current ratio of 1.24 times.

Of the RM23.42 million IPO proceeds, Reservoir Link plans to allocate RM10 million (42.7%) to buy services equipment, RM5 million (21.35%) to repay borrowings, RM4.92 million (21%) for working capital, and RM3.5 million for listing expenses.

At 41 sen per share, the IPO values Reservoir Link at RM116.85 million, based on its enlarged share capital of 285 million shares. Kenanga Investment Bank Bhd is the principal advisor and sole underwriter, which is underwriting 18.25 million shares or 6.4% of Reservoir Link’s enlarged share capital.

July 1 is the closing date for the IPO application.