part one: Richard Lorentz, Director Business Development, KrisEnergy, Singapore,
In the first part of this two-part interview, Richard Lorentz, Director of Business Development of KrisEnergy discusses the company’s successful IPO in July 2013, and pinpoints the unique characteristics of the SGX that make it a highly attractive stock exchange for start-up E&P companies to list on.
You have a long history in the oil and gas industry, which included you and your partners, building two upstream oil and gas companies: Pearl Energy, and more recently, KrisEnergy. How do you explain your appetite for building E&P companies?
Of the approximate 100 people in KrisEnergy today, almost all of them have worked with each other in the past. We all started out in Indonesia, which I suppose can be considered the focal point of everything that has come about since. At the time, I was in charge of New Ventures at a company called Gulf Indonesia (previously called Asamera Oil), while Keith Cameron was the CFO. Through an acquisition of a company called FECO, we were introduced to Chris Gibson-Robinson, who was in charge of exploration and production, and FECO was absorbed into Gulf Indonesia’s portfolio. Over time, Gulf Indonesia was listed on the NYSE and it was at the time of that IPO when we came together and the seed was planted for Pearl Energy.
Gulf Indonesia’s IPO took place before the Asian crisis in 1997 and we saw that there was a huge appetite for a publicly investable vehicle, focused on Southeast Asia. So we started talking about Pearl Energy bearing in mind one valuable lesson we had learned from the Gulf Indonesia experience: do not focus on one country. When Suharto, the former president of Indonesia, was asked to step down in 1998, every time something negative was reported in the news our share price in New York would plummet.
The underlying message to us was that there is a huge appetite for focusing on the region of Southeast Asia. We therefore decided to set up office and incorporate in Singapore to send the message that we were an Asian oil company focused on this region.
At the time, the three of us started out with an office manager and US$4 million in capital. In a nutshell, after a lot of work, Pearl Energy listed on the Singapore Exchange in April 2005 and shortly thereafter in 2006 it was unlisted and absorbed into Aabar and eventually into Mubadala Petroleum of the UAE. Between Aabar and Mubadala, Chris and I agreed to stay with the company and assist with the transition, while Keith resigned a little under a year before us to get the clock ticking on the one-year non-compete clause we were bound to. The day the Mubadala transaction was finalised, we handed in our four-month resignation notice and in 2009, after our non-compete had expired, KrisEnergy opened its doors.
Considering that Chris and I are both geologists, we like to see a lot of activity and wells being drilled. Moreover, we very much enjoy our line of work and that is what drives us in what we do.
What is it that a company like KrisEnergy can provide that others have not or could not?
One of our competitive advantages is that all of our senior technical people have over 20 years of experience, specifically within our geographical focus. In addition to this, our offices are all predominantly, if not entirely, staffed by locals, with the exception of the Singapore office. This applies to the entire hierarchy within the offices, including senior management, technicians and engineers. Of the 100 or so core people contributing to KrisEnergy’s success today, a third are technical and two-thirds of those are geologists and geophysicists. Almost all of them were born in this region and, if not, have worked most of their adult lives here.
This local content gives KrisEnergy a deep understanding of the local geographies and work cultures. If you look at our geographical coverage, from Bangladesh to eastern Indonesia, the geology is broadly similar—it is the same age and is composed of sandstone and limestone. To date, we have 16 properties, but have also signed over 200 confidentiality agreements over the last three and a half years. This demonstrates our capacity to screen a lot of potential targets due to our deep understanding of the regional geologies. Almost always, whenever an opportunity arises, we can screen it with great speed because someone in the company will have worked in a particular area at some point in their careers. For instance, there is not a part of Indonesia that Chris or I have not seen in our careers. This also puts us at an advantage when compared to the bigger IOCs, which tend to spin in expats that stay only for relatively short periods of time. This of course limits their effectiveness and familiarity with the local industry.
Another important differentiating factor for KrisEnergy is the fact that we are headquartered where we operate. By contrast, a similar sized company listed, for example, on the London Stock Exchange but operating here would certainly lack momentum going forward and excludes itself from the deal flow that goes on by being present here.
On the topic of exchanges, 19 July 2013 marked a milestone in KrisEnergy’s development when it was listed on the Singapore Stock Exchange. What were the decisive factors that motivated your decision to list here, instead of the Australian, Hong Kong or even the London exchanges?
This time round, the decision was largely driven by the great experience we had previously with Pearl Energy. The last time around, we looked at every exchange, from New York and London to Frankfurt, Hong Kong and Australia. Despite the difficulties associated with the fact that we were the first to pursue a pure exploration and production (E&P) oil and gas company listing in Singapore, there were various reasons to why we did not list in those exchanges.
Beginning with New York, we did not list there for the obvious reason that we had no connection to that market place. Also, although we underwent the same due diligence process here as we would have been required to do on the NYSE, we had the benefit of being a unique listing here. On the NYSE, we would have been just another company among many others. This was the same case as with Germany.
The closest exchange we came to pulling a trigger on was perhaps AIM (a sub-market of the London Stock Exchange), but our business plan did not match those of other companies on the AIM market. Most of the oil and gas companies listed there were speculative or exploration plays only, as opposed to our business model of production, cash flow and reserves. This would put us at risk of being compared to companies with pure exploration activities only, which would be unfair for us as a fully-fledged E&P player with assets across the entire E&P lifecycle.
Next, we looked at the Australian market. However, we found that Australian investors typically invest in exploration success in a speculative manner. As a well is being drilled, the share price goes up. Two days before the objective is reached, someone will sell a large holding, driving the share price down and leading to a volatile market. Because we drill so many exploration wells in the region, that is not an optimal situation for us. What we want is to build up the company steadily and observe a steady growth in our share price.
With KrisEnergy, we did seriously look at the Hong Kong Exchange. However, the companies that are similar to us are the PetroChina’s, the CNOC’s and the Sinopec’s of the world. Next to them, KrisEnergy would have been dwarfed. On the other hand, we could have also been compared to companies like Green Dragon Gas, for instance, which is active in CBM production and serves the retail markets. In any case, we would be either overshadowed or compared to the wrong peers.
Also, it is important to us to make sure we get the message across that we are an Asian company, our operations are here and our regional offices are largely staffed by nationals. The name KrisEnergy derives from the Keris, which is the most famous ethnic weapon or heirloom of the Javanese people that is also indigenous to Singapore, Brunei, Malaysia and Thailand. With that in mind, we thought why not list here? After all, Singapore boasts a great blend of economic, fiscal and legal regimes that provide for an excellent business environment.
Due to the SGX’s unfamiliarity with energy companies, some would point out that the financial infrastructures and mechanisms to support energy companies listing here are lacking or underdeveloped. Do you agree with this view?
When we listed Pearl Energy that statement would have been absolutely correct. There was a lack of analysts in the region that covered oil and gas companies. Pearl Energy had regular coverage from only three analysts and some of those were in fact former refinery specialists because they were the closest the financial houses could find to fit the bill. By contrast, today, five of our six syndicated banks have dedicated upstream oil and gas people covering KrisEnergy. In addition, we talk to a growing number of analysts from other banks who will likely initiate coverage at some point.
Analyst coverage is therefore not so much of an issue today, as it was in the past. The challenge that we did encounter this time around related to the underdeveloped set rules and guidelines for listing on the SGX Mainboard. After all, KrisEnergy was only the second pure oil and gas exploration and production company to be listed on the SGX Mainboard, preceded only by Pearl Energy.
More specifically, the SGX is developing with the Monetary Authority of Singapore (MAS) the regulations governing listing of mineral, oil and gas (MOG) exploration companies on the Mainboard. These are not even rules yet so during the KrisEnergy listing process we had to figure out what would satisfy the SGX and MAS based on the guidelines put forward from a consultation paper. We drafted the prospectus in accordance with the highest standards of the SGX guidelines that we knew to work. At the same time, we also consulted with the SGX on those points which we knew to be operationally counterproductive or inapplicable to our industry to help them understand the specific nature of the upstream oil and gas business.
Today, after long deliberation and steep learning among the various parties, I guess you could say that the KrisEnergy prospectus sets the precedent and may be viewed as the most likely guidelines that would apply to upstream oil and gas companies looking to list on the SGX Mainboard.
Based on your experiences in the field, how would you describe the greatest challenges in accessing Asia’s capital markets and investors?
Because of our track record, we didn’t face any significant challenges. In fact, we have all sorts of potential investors knocking on our door keeping our CFO rather busy. However, that would certainly not have been the case if we had to do it all over again without our previous track record.
Essentially, it boils down to your business plan and your track record. When we secured the US$500 million in equity commitment from First Reserve, we were also negotiating five other US$100 million term sheets. In other words, we were able to raise about US$1 billion of appetite when all we were looking for was a less than a third of that. To put it into context, this was during 2008; the onset of the global financial crisis when, according to financial news agencies, the world was coming to an end. Even today, our CFO and our Chief Treasury officer are constantly approached by investors.
You really cannot emphasize enough the importance of management’s track record; it makes a world of difference.
Apart from the advantages of being associated with one of the biggest and strongest blue-chip companies in the industry, what other synergies are you able to realise having Keppel as a major shareholder?
It certainly does not get any bluer-chip then Keppel Corp in Singapore; a company well known to be deeply involved on the service side of the oil and gas industry. In addition to the credibility boost, we also benefit from having Mr. Choo Chiau Beng and Mr. Loh Chin Hua (CEO and CFO of Keppel Corporation, respectively) on our Board. The fact that Keppel exercised its call option and acted as a cornerstone in the IPO were other significant advantages for KrisEnergy and a vote of confidence.
In terms of synergies, however, we are somewhat limited in our capacity to realise significant advantages. This is primarily because the SGX is highly sensitive to related-party transactions. Nonetheless, one thing we have been able to do is to second a highly talented mechanical engineer from Keppel into our organisation because of all the developments we have ahead of us and he is contributing greatly to the company. In addition, we always try to leverage the industry know-how and global network that Keppel has developed.
Conversely, are there any downsides to having Keppel as a major shareholder? For instance, one that affects your decision making process?
None. I have to say that when we send out board memorandums, Mr. Choo Chiau Beng is almost always the first to respond. In fact, one of our concerns when Keppel came on board was that they would not be active enough, which could not have been farther from the truth. All in all, we enjoy a good relationship with Keppel and greatly value the validation they bring in the Singapore market.