-  The oil & gas (O&G) sector looks set to be re-rated further with fresh news flows of mergers & acquisition (M&A) activities. Yesterday, Yinson Holdings proposed to buy Oslo-listed Fred Olsen Production ASA (FOP) for RM551mil via share placements and bank borrowings, which will raise its gearing from 1.6x currently to 2.5x. FOP has 3 floating production storage and offloading (FPSO) vessels (including 2 wholly-owned units and a 50%-owned unit with BW Offshore) and a mobile offshore production unit. These vessels are operating in Nigeria and Gabon.

-  With this acquisition, Yinson will have equity in 4 FPSOs and a floating storage and offloading unit, which will propel the company into the ranks of the more formidable FPSO players in the region, comparable with Bumi Armada, which has five FPSOs currently. But we note that this deal will be EPS dilutive for Yinson, which trades at a PE of 11.9x for FY January 2015 while FOP is valued at 24x for FY14F based on Bloomberg estimates.

-  But this development will raise Kencana Capital’s stake in Yinson from 4.5% to 18.5%. Datuk Mokhzani Mahathir is a significant shareholder in Kencana Capital, which is not related to SapuraKencana Petroleum. As SapuraKencana currently has a 50% stake in the Berantai FPSO, we would not be surprised if this spurs further speculation that there could be fresh M&A’s after the group’s recent massive acquisition of Seadrill’s tender rigs.

-  The Star also reported yesterday that Tanjung Offshore, which sold off its offshore support vessel division in April last year, is in the final stages of acquiring a controlling stake potentially worth up to RM1bil in a foreign offshore oil & gas company, which owns and manages several offshore oil rigs. This will be funded via the issuance of new shares and bonds.

-  Recall that Dayang Enterprise has been steadily increasing its stake in Perdana Petroleum to 26% currently while Wah Seong secured a 27% stake In Petra Energy last year. We expect these developments to spur speculations of M&A activities for companies which are relatively small but seeking to position into a faster growth model such as Alam Maritim Resources, Coastal Contracts, TH Engineering, KNM Group, Wah Seong Corp and Scomi Group.

-  Besides M&A activities, the fundamentals in the sector remains intact as Petronas will be ramping up its project rollouts in the 2H2013. By 1Q2014, the final investment decision for the RM60bil RAPID project in Pengerang will be made but already Petronas is calling for a tender for Package 8 involving the construction of cumene, phenol and bis-phenol A production units. This looks set to catalyse multiple tank terminal projects in Southern Johor. In the short- to medium-term, excitement in the sector will still largely stem from the larger field projects in Malaysia such as the enhanced oil recovery projects for Semarang, Bokor and Dulang fields; gas cluster developments for the North Malay basin; as well as in Sabah and Sarawak which are tied to the completion of the Bintulu LNG complex expansion in 2015. In view of the multiple flows of contract this year, we maintain our OVERWEIGHT call on the O&G sector with BUY calls for SapuraKencana Petroleum, Alam Maritim, Dialog Group and Petronas Gas. Given the continued run-up in share prices of the stocks under our coverage, we will be revisiting our forecasts and fair values in our upcoming reports.

Source: AmeSecurities