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What’s Attractive About KrisEnergy For Big Investors Like Keppel Corporation?

KrisEnergy (SGX: SK3) is an oil and gas exploration and production company with its main assets located within Southeast Asia. It is still very early in its exploration cycle; the company has yet to reach its breakeven point.

When we look at a company like KrisEnergy, any possible investment thesis that can be built around it would seem rather speculative. However, there is one very interesting catch: Keppel Corporation (SGX: BN4), one of the largest conglomerates in Singapore with a market capitalisation of S$19.4 billion, had invested in KrisEnergy in 2012 through a private placement.

In fact, Keppel Corp is currently the second largest shareholder in the company with a 31.4% stake. Why would Keppel Corp buy into KrisEnergy? Is there something that we are missing about the company?

KrisEnergy’s business

KrisEnergy first went public on Singapore’s Mainboard exchange on July 2013. At the end of its financial year in 2013 (the company’s financial year is the same as the calendar year), the company has already contracted 17 areas for exploration. Unlike many other mid-sized exploration and production companies that could never reach the production stage, KrisEnergy actually has oil & gas wells that are already in the production phase (i.e. those wells are already churning out oil & gas) and most of the company’s capital expenditures have gone toward the development of those wells.

However, having gone through KrisEnergy’s annual report, I find it hard to see any differentiating factor that can separate the company from the rest of the pack in a positive way.

So, the key factor here regarding Keppel Corporations’ willingness to invest in KrisEnergy might be the relative difference in size between the investment and Keppel Corporation’s asset base. At Kris Energy’s current market price of S$0.78, Keppel Corporation’s stake in the company is only around S$250 million – the cost of Keppel Corporation’s investment is even lower than that. The stake of S$250 million, when compared to Keppel Corporation’s asset base of about S$30 billion, accounts for less than 1%.

Foolish take away

Thus, the take away here is that size of the allocation into each investment matters. Although KrisEnergy might seem like a high risk/high return type of venture, Keppel Corporation’s investment in it is sized in such a way that its entire asset base can be protected from any unnecessary overall downside risks. That’s something we can learn from for our own investing activities.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.