Highlights

Yesterday, SapuraKencana hosted a conference call on the proposed acquisition of Newfield’s O&G assets in Malaysia. Newfield intends to exit the international business and focus on the shale gas in US which require intensive capital investment.

Management is confident that the current oil fields can sustain for 7 to 9 years at an average production of 25k barrel/day with intervention and enhanced oil recovery measures. The SK310 with estimation of Gas Initially In Place (GIIP) ranges from 1.5-3trn cubic feet. Upon commencement of production in 2016, it will have 10-20 years of life span. There will be minimal capex for existing producing oilfields but SK310 may require total development cost of US$1.7bn (translate to US$510m for its 30% stake) and SK408 will require capex of US$217m (translate to US$87m for its 40% stake).

For SK408 gas field, the size of reserve is almost same or larger than SK310 and it is surrounded by proven oilfields with 45-55% chance of success rate. It may require less capex given its close proximity with existing infrastructure.

Upon signing gas sales agreement (GAS), the estimation of 2C contingent resources for SK310 and SK408 will convert to 2P (Proven and Probable) reserve in 2016 and 2017 respectively. We also understand that SapuraKencana might booked in one-off 9 months (July 13 to Apr 14) of accrues economic profit (~US$110m) in FY15.

Comment

We came away more positive on the deal after the conference call. This acquisition will help SapuraKencana to diversify its portfolio of business and gain immediate foothold and recognition as an upstream resource owner and operator.

This acquisition price translates to US$25/boe of 2P reserves versus recent international transaction range of US$15/boe to US$32/boe. To note, there will be upside to the current 2P reserves of 36m given the huge estimation of GIIP for SK310 and SK408 gas fields.

Based on our assumption of: 1) net profit these assets decline to US$150m from US$240m in 2012 due to declining oil production (versus management guidance of US$150-200m); 2) 80% debt funding; 3) USDMYR of RM3.2; and 4) finance cost of 7%, the acquisition will raise SapuraKencana’s net gearing from 1.1x to 1.3x. We expect it to be earning accretive and will increase our FY15 earnings forecast by 22% (versus our initial forecast of increase by 11%). We have not factored in any contribution from the new gas fields yet as it would only start production in 2016 and 2017 with significant development cost of around US$727m over 2-5 years in order to monetise the asset.

Risks

• Execution risk,
• Escalation of vessel, fabrication and drilling costs.

Forecasts

Maintained forecast pending completion on the deal.

Rating

BUY

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

Negatives – Increased competition for growth markets and 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 - 1 Nov 2013