Kencana Petroleum Bhd is buying out its partner Mermaid Drilling (Singapore) Pte Ltd

with proposed acquisitions of the latter?s 75% stake in Mermaid Kencana Rig 1 Pte Ltd (MKR1), 40% of Kencana Mermaid Drilling Sdn Bhd (KMD) and 75% of Mermaid Kencana Rigs (Labuan) Pte Ltd (MKR Labuan) for a total of US$66.6 million (RM212.5 million) cash.

Under the inter-conditional proposals, the three companies will then become wholly owned units of Kencana, held under Kencana Petroleum Ventures Sdn Bhd.

The total price tag included the settlement of inter-company loans and other debts amounting to US$22.95 million.

Mokhzani controls 39.19% of Kencana?s equity.

MKR1 owns and operates a self-erected rig and derrick equipment which is likely to be commissioned in the second half of 2010. The rig in turn is chartered out to MKR Labuan, which in turn has leased the rig to KMD.

KMD has been awarded a US$235 million contract by Petronas Carigali Sdn Bhd for a five-year contract, with an option for an additional five years? charter. MKR1 has taken a loan of US$68 million, out of which some US$15.95 million is drawn down, which will be fully settled pursuant to the acquisition.

The acquisition would be funded via a mix of cash and bank borrowings. As at end-January 2010, Kencana had cash and cash equivalents amounting to RM577.83 million and receivables, deposits and prepayments amounting to RM262.74 million.

For the first half of its fiscal year ending July 31, 2010 (FY10), Kencana posted a net profit of RM63.12 million on the back of RM531.14 million in revenue, with an earnings per share (EPS) of 6.97 sen. For the corresponding period a year earlier, it posted a net profit of RM60.31 million on RM592.58 million in sales, with an EPS of 6.69 sen.

As at end-May 2010, Kencana had an order book of RM1.9 billion.

Its proposed acquisition of O&G assets is a sign of things to come in the sector. Smaller players in the industry are accumulating assets across the value chain to improve their chances of winning jobs from Petronas.

Petronas has rolled out its domestic capital expenditure, with more than RM10 billion worth of jobs to be awarded to O&G players, so competition is stiff.

The exercise will transform Kencana from being a solely a fabricator to owning downstream assets such as the offshore drilling company. Kenanca has said the acquisitions will increase the group?s involvement in the drilling rig operations by Petronas.

Industry observers say Kencana?s corporate exercise will put the group in a strategic position to secure some of the larger O&G jobs to be awarded by Petronas. An industry observers says given that jobs are more likely to be awarded to bigger O&G players, a large asset size is key to securing contracts.

In the past Petronas would break up portions of the contracts to be awarded to several O&G players. But now, the new Petronas management is likely to favour companies with assets that have the ability to provide end to end services.

This stems from the government?s call to have fewer but larger and more efficient O&G players under the 10MP. Minister in the PM?s Dept Datuk Seri Idris is leading a group of comprising representatives from the private and public sectors to come out with a master plan to develop a cluster of large O&G players.

Kencana has an order book of rm2 billion currently. Fabrication is Kencana?s mainstay, with some 80% of its revenue coming from this area of business. Hence, it is not surprising the group is aggressively acquiring assets to step up its competitiveness.

Industry players expect the competition to heat up among O&G players, especially with the impending listing of Malaysia marine & Heavy Engineering Sdn Bhd (MMHE) ? a unit of Petronas ? in Oct 2010.

The listing of MMHE and higher contract flows to O&G players should stir up the sector.