Dialog Group Bhd’s purchase of its first overseas upstream oil and gas (O&G) asset is generally seen as positive by analysts.

       Despite that, the move does not seem to have overly excited investors.

       Dialog shares, which stood at RM2.27 a piece on Monday prior to the announcement that it was buying an onshore oil producing field in Thailand, briefly rose by seven sen to RM2.34 the day after.

       But soon after, Dialog’s share price lost that rise and closed at RM2.17 a piece yesterday.

       A dampened overall market could also be a reason why Dialog’s shares have not risen in light of the recent purchase.

       Year-to-date, Dialog is down 18.1%, with a market capitalisation of RM12.35bil.

       Overall, analysts are positive on Dialog’s acquisition. Dialog is paying RM170mil cash for an entire stake in Pan Orient Energy Corp (POEC), which is a listed Canadian O&G firm that owns a 50.01% stake in Pan Orient Energy (Siam) Ltd (POES).

       POES operates concession L53/48, onshore Thailand, that produces 2,700 barrels of oil per day from 22 wells from seven mature oilfields located 100 km northeast of Bangkok.

       Bigger output

       The inclusion of POES into Dialog’s portfolio of upstream O&G assets may boost the group’s oil production by 50%, estimates CGS-CIMB Research.

       The proposed acquisition appears to be expensive as it is being done on a price-to-book value multiple of 2.28 times.

       However, CGS-CIMB Research notes that the target’s high return-on-equity (ROE) should be a comfort to Dialog shareholders.

       The research house says that the price is justifiable based on POES’ annualised first-quarter ROE of 84%.

       Given the rising oil prices and the US dollar appreciating against the ringgit, CGS-CIMB Research reckons that Dialog’s net profit for the financial year ending June 30, 2023 (FY23) should rise by at least 11%.

       RHB Research, which is also positive on the acquisition, says Dialog’s near-term earnings would get a boost due to strong oil prices.

       It points out that the onshore oil assets being acquired have relatively low operating risks and lifting costs.

       Mature asset

       It notes that POEC is a mature oilfield asset with a low operational cost of US$7 (RM30.74) per barrel.

       RHB Research says the acquisition could be funded internally or through external borrowings including proceeds from sukuk issuances.

       However, despite those positives, one fact remains clear – that Dialog is buying an upstream asset at a time when the price of crude oil is soaring high.

       The concern thus is whether Dialog is paying a high price by buying at the peak cycle of the price of oil and secondly, what will happen if the price of oil goes down?

       These risks are highlighted by some analysts foreseeing the acquisition as a negative development amid the high oil-price environment.

       Hong Leong Investment Bank says the high oil-price environment explains the valuation premium.

       It also estimates that the acquisition would merely bring about a net profit contribution of RM15mil to RM20mil per year, which is insignificant compared to the group’s large earnings base of about RM500mil per year.

       Kenanga Research echoes similar views, noting that the timing of the acquisition is “slightly debatable”, especially under the current elevated oil prices that has led to “mildly inflated valuations”.

       Nonetheless, UOB Kay Hian Research says that Dialog has been preparing its war chest and sees the opportunity to expand its upstream sector via mergers and acquisitions (M&As), focusing on low-risk production assets.

       Monetising investment

       It says POEC’s reason to sell is to free up its cashflow to monetise the Sawn Lake heavy oil project in Alberta, Canada, and participate in new oil concessions in Thailand.

       Based on the net proven and probable reserves of 2.3 million barrels of crude oil, the deal implies an enterprise value per barrel of US$16.80 to US$18 (RM73.39 to RM79.06), in line with current peer valuations, adds UOB Kay Hian Research.

       Although it can potentially benefit from high prices and boost Dialog’s income by 10%, UOB Kay Hian Research adds that its sum-of-the-part valuation accretion is small, as the M&A is being done on late life assets during high oil prices.

       Notably, this purchase is not Dialog’s first upstream asset. One of the upstream companies it owns is Haliburton Bayan Petroleum Sdn Bhd that is providing contractor services for the Bayan field.

       And due to the high oil prices, the upstream sector has benefited and contributed to the increase in revenue for its latest third quarter ended March 31 (Q322) results.

       The group’s revenue jumped 46.5% to RM593.4mil in 3Q22 from RM405.2mil in the corresponding period a year ago.

       In a filing with Bursa Malaysia, Dialog said the higher revenue reported by the Malaysian operations in the quarter was driven by increased activities in the upstream, midstream and downstream activities.

       Post-3Q22 results, however, analysts had a mixed view on Dialog’s target price forecast.

       Last month, CGS-CIMB Research cut its sum-of-parts (SOP)-based target price for Dialog from RM3.58 to RM2.77 “to reflect the higher risk-free rate in Malaysia, which rose over the past three months from 3.3% to 4.4%”. But it maintained an “add” call on the stock.

       On the other hand, Hong Leong Investment Bank maintained its SOP-derived target price of RM3.32, implying a 46% upside to its current share price.

       Based on Bloomberg data, there are 17 analysts that cover Dialog, of which 16 have “buy” calls, with only one with a “hold” recommendation and none having a “sell” call.

       The concensus target price is RM3.32.