News

SapuraKencana announced that the company and Newfield International Holdings have entered into a conditional sale and purchase agreement (SPA) for oil assets in Malaysia. Newfield’s assets in Malaysia are held under three companies-Newfield Peninsula Malaysia, Newfield Sabah and Newfield Sarawak. The total purchase price is up to US$898m or RM2.85bn. The asset comprises proven and probable 36m barrels of oil equivalent as of 31 Dec 2012 with current estimated production of 23,000 barrels oil per day.

The deal is subject to approval from Petronas and SapuraKencana shareholders and expects to be completed by 1Q2015. Collectively, the companies have 50% equity interest in Block PM318, 60% stake in PM323, 70% in PM329, 50% in AAKBNLP, 30% in SK310, 40% in SK408, 50% limited to New Oil Production and New Facilities in Tembungo, 40% stake in Block 2C and 25% in Block SK319.

To note, Newfield Malaysia made a natural gas discovery off the cost of Malaysia, known as Block SK310, its largest conventional exploratory success. Newfield has 30% interest with the remainder held by Petronas - 40% and Mitsubishi - 30%.

Comment

We are positive on the deal and have not factored into our forecasts. This deal will enable SapuraKencana to gain an immediate foothold and recognition as an upstream resource owner and operator. The company has edged out competition from Talisman Energy, Puncak Niaga and hibiscus Petroleum.

To note, Newfield intends to offered preferential rights to its partner under the Joint Operating Agreement. In the event any of the PSC partners exercise their preferential rights for a particular asset, the allocated value of the respective asset shall be reduced from the purchase price of US$898m.

This acquisition price translates to US$25/boe of 2P reserves versus recent international transaction range of US$15/boe to US$32/boe.

Besides, SapuraKencana together with Petrofac is looking to tender for Petronas’ matured PM-6 and PM-9 blocks. We understand that SapuraKencana is competing with Talisman Energy and Schlumberger on these fields. Successful bidding will transform SapuraKencana to be major player in E&P segment.

Financial Impact

Based on our assumption of i) 70% debt funding, ii) USDMYR of RM3.2, iii) finance cost of 4%, the acquisition will raise SapuraKencana’s net gearing from 1.1x to 1.3x. We expect it to be earning accretive and increased our FY16 earnings forecast by 11% assuming RM170m bottomline contribution.

Risks

• Execution risk,
• Escalation of vessel, fabrication and drilling costs.
• Forecasts
• Maintained forecast pending more info from management.

Rating

BUY

Positives – Strong balance sheet and knowhow, global trend towards offshore production.

Negatives – Increased competition for growth markets, complexities of running a larger organization.

Valuation

Maintain BUY call with an unchanged TP of RM4.74 based on 20x EPS of 23.7 sen/share based on FY01/15 EPS.

Source: Hong Leong Investment Bank Research - 23 Oct 2013