- We maintain our BUY call on SapuraKencana Petroleum (SapuraKencana) with an unchanged fair value of RM4.80/share, based on an FY16F PE of 18x

- SapuraKencana announced yesterday that the group have entered into a sale and purchase agreement (SPA) with Petronas Carigali to purchase the latter’s stakes inoil & gas production blocks in Vietnam for US$400mil.

- The interests in the production blocks are as follows:-

i) 50% stake in the Petroleum Contract for Blocks 01/97 and 02/97 Cuu Long Basin;

ii) 40% stake in the Production Sharing Contract (PSC) for Blocks 10 & 11.1, Nam Con Son Basin; and

iii) 37% in the PSC for Block 46-Cai Nuoc, Malay- Tho Chun Basin.

- These blocks have an estimated net proven and probable resource (2P) of 17.4mil barrels of oil equivalent (mmboe) with a daily production rate of 22,000 boe.

- Assuming extraction costs at US$30/barrel, sales royalty of 10%, petroleum income tax of 26% and average crude oil price at US$80/barrel, we estimate that the daily production rate could yield an EBITDA of RM450mil for SapuraKencana.

- This would possibly lead to a full year contribution to FY16F earnings of ~10% after accounting for depreciation and interest costs. We maintain SapuraKencana’s FY14F-FY16F earnings for now pending further details from management.

- We understand that this acquisition would have minimal impact on gearing and management guided that the group is still well on track on achieving its target of less than 1x debt/equity and less than 3.5x debt/EBITDA by FY17.

- We remain positive on the group’s order book accretion and it remains on the prowl for fresh tenders of RM27bil, as bids for Malaysia’s prolific central processing platform projects could materialise soon.

- The stock currently trades at an attractive FY16F PE of 12x currently – less than half of SapuraCrest Petroleum’s peak of 29x back in 2007.

Source: AmeSecurities