- We maintain our BUY recommendation on SapuraKencana Petroleum (SapuraKencana), with an unchanged fair value of RM4.65/share - based on an FY15 PE of 22x, which is the 2007 peak achieved by Kencana Petroleum.

- We remain positive on the group’s game-changing proposal to acquire Newfield Exploration Co’s interests in 8 Malaysian production blocks following a teleconference yesterday. These are the salient takeaways:-

1)     The proven and probable reserves of 36 million barrels of oil equivalent (boe) indicated in the earlier announcement are largely crude oil. These alone will have a production life of 7-9 years while upcoming gas discoveries could have a span of 10-20 years.

2) For SK310 block, Newfield has made a discovery earlier this year of 1.5tril-3 tril cubic feet (tcf) of gas which translates 250mil-500mil boe. This is not included in the earlier reserve announcement. Given SapuraKencana’s 30% stake in the block, this field alone could easily triple the earlier reserve figure. For SK408 in which SapuraKencana has a 40% stake, there is a likelihood of similar sized reserves given that the block is already in the midst of multiple fields which are already in operation.

3) Operating capex for producing oil fields are likely to be minimal while development capex estimated for SK310 is US$2.7bil and SK408 is US$217mil. Based on the group’s equity stake, its effective exposure is RM2.8bil. Including the purchase price of US$898mil and assuming a debt-toequity ratio of 80:20, we estimate that the group will need to raise RM566mil - which will move net gearing slightly from 1.2x to 1.3x in FY15F.

4) While the group holds majority stakes in 5 production blocks- 50% in 318, 60% in PM323, 70% in PM329, 50% in AAKBLNP and 50% in new oil production and facilities in Tembungo off Sabah, we are positive on Newfield continuing to manage their operations throughout these concessions. 5) Management guidance of incremental earnings of US$150mil-US$200mil is within our earlier projection of US$168mil- translating to a 38%-50% surge in FY15F earnings. But as contributions from the field retroactively commences on 1 July 2013, there is a strong possibility that a 9-month result could materialise in 1QFY14 when the deal is completed. This also means that the Newfield assets could have a 21-month contribution in FY15F, potentially doubling our current estimate for SapuraKencana’s earnings.

- As SapuraKencana is poised to become a truly formidable regional O&G upstream operator, its valuation remains attractive at the current FY15F PE of 19x, which is at a 34% discount to SapuraCrest Petroleum’s peak of 29x in 2007.

Source: AmeSecurities