I stumbled over Japan Petroleum Exploration Co., Ltd. or Japex via Inpex (1605 JP) …
This is not investment advice. Please read the disclaimer.
I might currently or at a later point in time own shares (economic interest) in mentioned or related companies.
I wrote a small twitter thread about Inpex’ Q3 results and its revise guidance for FY results, which still seems conservative based on current Brent prices. Inpex bought back a good chunk of shares from Japex in November (link) and I decided to take a look based on a low P/B metric (and potential willingness to monetize assets).
This is another part of my series of Quickies on new companies.
The balance sheet (as of March 31, 2021) shows total net assets of JPY 434bn vs a market cap of 126bn as of Nov 8th, indicating a low P/B of 0.3x. Consolidated assets mostly consist of (i) cash and equivalents, (ii) PPE and (iii) investment securities. Total net assets increased to 450bn as of June 30 for an 0.28x (link).
Its Inpex stake accounted for 3/4 of its investment securities. Its Inpex stake was recorded at JPY 80bn in March 2021. Since then, Inpex stocks have gained +25%. Japex sold a good chunk of its Inpex stake to Inpex for JPY 946 per share in November, reducing its stake from 7.3% to 3.8%.
Based on asset value Japex looks quite nice – BUT… Sadly, they pay rather low dividends despite a big cash pile. Monetizing some of their assets might lower their discount to asset value, but without further catalysts this might not be enough. Such catylasts (higher divis, buybacks, …) are not too likely I guess with the Japan Ministry of Economy Trade and Industry as the biggest shareholder (34%) likely being more interested in using that cash (and other values) for pursueing its mission instead of caring for minority shareholders. Other big shareholders are Inpex (5%), and Government Pension Investment Fund Japan (5%).
Orbis allan gray is the second biggest shareholder (12%) and they seem to have recently added to their position. The question here is, if they will drive value realization? Their Japan fund also holds a big stake/allocation in Inpex (link), as do the ministry and Japex. I found Orbis’ investment thoughts here (p 8f). Surprisingly, they mostly see the same value (and problems), and they highlight an incredibly value accretive move from Inpex to buy Japex, effectively buying back their shares. Just now, this potential catalysts did disappear, unfortunately, since Inpex bought back a chunk of its shares from Inpex. When I found this document, I hoped for fidning some activist roadmap, since I also found this doc from Lazard. But I foudn nothing else hinting at an activist investor playbook — which might be needed here to realize tons of value, esp. after Canadian assets were recently sold (news).
If Japex might merely increase shareholder returns like double its current dividend (for a then 4.5% yield) and show some growth, this could be a solid investment. Japex will report its Q3 results tomorrow (NOV 9).
Japex business segments (below) show a dispersed and volatile performance over time (integrated report for FY2021, ending March 2021), including drastic impairment charges. Page 50 shows Ebitda and CFFO seem much more stable, still, net assets per share were flat around JPY 7k from 2012/3 to 2021/3 and dividends per share are back to 2012/3 levels after a strong dip in FY2017/18.
- Oil and Gas E&P
- domestic
- overseas
- Infrastructure/Utility
- New Business Development
Operating development seems quite good (below: first 6m, vs yoy). Japex increased FY operaing income forecast to JPY 16.67bn (up from 13.48). Partial sale of Inpex stake is used for buybacks of up to 5%, dividend not raised, and investments in various projects.
I hope you enjoyed this post.
Further reads
- https://www.japex.co.jp/en/ir/
- https://www.orbis.com/international/institutional/insights/commodities-survival-of-cleanest
- https://corpgov.law.harvard.edu/wp-content/uploads/2018/11/Lazard-13F-Filing-Analysis-3Q-2018-vF.pdf
searching 4 value 
The discovery process has not changed much since then, so you might be surprised at how simplistic technology has become in todayās oil exploration activities.
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What are you referring to exactly?
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How will Orbis change the government’s mind on merging the two and/or Japex selling it’s Inpex stake?
Why would Inpex buy Japex, for example? Given the whole point of these two businesses is to give METI officials jobs post-retirement acquiring and delsiting Japex extinguishes this job.
Additionally, the Japex job always goes to the Vice Minister so the ‘junior’ entity is buying the ‘senior’ entity… What would make METI agree to this?
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Thank you for your critical comment.
When I discovered Orbis as a significant shareholder (besides ministry, Inpex) I was hopefull to find some activist aagenda they want to drive (I did not).
Inpex would buy Japex because it would have been, effectively, a tremendously beneficial share buy back for Inpex.
I do not know what would make them agree, probabaly some (true) broad political desire/order from atop for modernisation and corporate efficiency…
To be clear, these are valid points and I did not think the possible actions outlined by Orbis were likely (now, Japex sold good chunk of its Inpex stake to Inpex)
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I agree that from a shareholder returns perspective a buyback for Inpex is highly accretive BUT the issue here is the main stakeholders are not thinking about this from a returns stance
They have different objectives, primarily the preservation of some weird amakudari pecking order
I do think – as you noted – that inpex buying back some of it’s shares is a good first step
The issue with a lot of these situations in Japan is they take a very long time to crystallize if you are thinking about this as some event driven situation
A similar situation exists with JT… It would make enormous sense for MOF to not be in the co for a lot of financial and regulatory reasons but that logic has yet to trump ‘jobs for the boys’ and the only time it did recently was because the LDP were not in power
Thanks for the write up though it was well expressed
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Thank you very much for your comment. The critical ones are the most useful ones usually, especially in these SOTP cases I believe.
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