Daily Brief Energy/Materials: Rex International Holding, Medco Energi, Lsb Industries and more

• Rex reported a disappointing set of results mainly due to continued struggles in Oman. While Oman production was well over 10K bpd in 1H21 it deteriorated every month in 1H22.
• Revenue was 99.45M USD (+31%) but we estimate it would have been closer to 149M USD if the Yumna field wouldn’t have stopped producing for almost 70 days in 1H22.
• YTD stock is -23% and can only reverse if management proves Oman is ready to rebound. Dividend payments will start on a quarterly basis as of October 2022.

Medco Energi’s H1/22 results were strong as expected. This was supported by increased production following the ConocoPhillips Indonesia (CIHL) acquisition in March, as well as the high oil-price environment. We expect the company to deleverage further going forward, supported by earnings growth, strong OCF generation and debt repayments. The full-year FCF deficit should also narrow to a mildly negative level. We note positively management’s intentions to reduce debt, including to fully repay the USD 850 mn in debt taken on for the CIHL acquisition by 2024. Cash/ST Debt was inadequate, but we do not foresee any near-term refinancing risks.

• This model seeks companies that are potentially “overearning”, defined as companies with unusually high margins relative to their own history or relative to the industry. 
• The reasons for the margin increases are sometimes unsustainable or fraudulent. The  critical judgement involves to what extent unsustainable margins are embedded in a company’s forecasts and/or the stock’s valuation. 
• These shorts tend to have moderate to higher betas, higher valuations due to recent strong results and good short responses to subsequently disappointing earnings.