This article appears in Issue 783 (June 12) of The Edge Singapore which is on sale now
(June 14): Sydney Yeung, CEO of GSS Energy, thinks investors are undervaluing the company’s oil and gas (O&G) business. Formerly a precision engineering company known as Giken Sakata, GSS now also has an onshore oil production business in Indonesia. Last year, it entered into an agreement with Indonesian state-owned oil company Pertamina to assist the latter in producing petroleum at the Trembul Operation Area for a period of 15 years. The 47.6 sq km area in Central Java is estimated to have approximately 24.3 million stock tank barrels of contingent resources at a depth of up to 800m. Stock tank barrels refer to the volume of oil after production at surface pressure and temperature.
GSS is entitled to 23.5% of the petroleum and 31.4% of the natural gas in the Trembul Operation Area after accounting for operating costs. Under the terms of the agreement, GSS will be able to recover all its operating costs. There is also no minimum level of production required. “We are now at the advanced stage of preparing for production and expect to commence drilling by 2H2017,” Yeung tells The Edge Singapore. “We see a lot of opportunity to grow in the O&G sector, especially in Indonesia where demand can only rise as the country develops.”
Shares of GSS are in fact up 98.8% this year, closing at 17 cents on June 7. That gives the stock a price-to-earnings multiple of 6.1, which Yeung argues is “way below its market value considering the agreement we have with Pertamina and the geography we are in”.
That could be because the O&G division has not generated any revenues yet. GSS’ earnings still come entirely from precision engineering.
For 1QFY2017, GSS reported a 28.3% y-o-y increase in revenue to $21.7 million. Earnings rose 55.5% to $1 million.
Yeung’s involvement with GSS dates back to August 2013, when he acquired a 29% stake in Giken Sakata through his private equity firm Roots Capital Asia. In November 2014, Yeung injected an entity called GSS Energy into Giken Sakata via a scheme of arrangement. At the time, GSS Energy was an investment holding company owned by Yeung. The listed entity was subsequently renamed, as Yeung’s intention was to transform it into an O&G company. GSS Energy subsequently acquired the right to extract oil from two oil fields in Java in 2015.
As it was still profitable, the precision engineering business was retained as a wholly-owned subsidiary of the company. That was just as well, as the contract in Java was cancelled in 2015. “At our current level, the market is still valuing us as a precision engineering company, not an O&G business. But once production commences this year, things will change,” says Yeung, who has been investing in and advising on Indonesian oil projects since 2007. Roots Capital Asia currently owns 18% of GSS.
Still, the timing for the restructuring is not great. The local O&G sector has lost its shine, as oil prices have stayed stubbornly low and companies in the exploration and production supply chain have reported losses. Others, including Swiber Holdings, Swissco Holdings and Ezra Holdings have defaulted on their loans.
Meanwhile, GSS’ precision engineering arm could continue to do well. The company will open a new engineering factory in Changzhou, China this year, which will focus on higher-value products and electronics manufacturing services. At present, it has two facilities: one in Singapore, and the other in Batam, Indonesia.