News

SapuraKencana  (SKP)  announc ed to acquire three  blocks  of oil  assets  from  Petronas  Carigali  in  Vietnam  with  total purchase  consideration  of US$400m.

The  details as below: i)  50% interest for Block 01/97  and 02/97 (producing  oil); ii)  40% interest  for Block 10  and  11.1 (exploration  oil); and iii)  36.8% interest for 46 Cai Nuoc (producing  oil and gas)

Economic  benefit  of  the  interest  accrues  from  1  Jan  14  and transaction expected to be completed by FY 01/16

In  addition,  SKP  also  awarded  PSC  for  Block  SB 331  and SB332  onshore  Sabah  with  participating  interest  of  70%, while  M3nergy  and  Petronas  Carigali  will  own  the  remaining stake.  SKP  will  commit  US$40m  over  next  3  years  which include  drilling  3  wells  and  acquisition  of  new  2D  seismic data. The  PSC will last for 27 years. Financial impact

We  expect  the  Vietnam  acquisitions  to  increase  2P  oil reserves  by  80%  to  39mm  boe.  The  acquisition  price translates  to  US$23/boe  as  compare  to  Newfield  at  US$25 and  Salamander’s  B8/38  at  US$20.  Hence,  we  deem  the acquisition  as fair and reasonable.

Assuming  net  production  of  11k  bbl/d  from  Vietnam  asset with oil price at US$80/bbl, we estimate it to contribute ~13% to FY01/16 bottomline.

We  estimated  the  company  is  still  on  track to  reduce  its   net gearing  to below  1x in FY17 from 1.2x in FY15.

Pros/Cons

We are positive on  the acquisition of Vietnam asset as this is aligned  with the company strategy to grow its res erves size. The  acquisition  assets  is  well  balance  given  its  immediate cash flow  from producing  wells  while  positioned to  potentially enjoy development  and exploration  upsides.

We  understand  the  assets  are  primarily  shallow  water  and located  closer  to  existing  infrastructure  which  will  minimise development  capex.  We  are  confident  about  the  company execution ability  given it has success fully   double its reserves and resources size with the discovery  in SK408.

As  for  the  SK310  and  SK408  gas  fields,  potential  inking  of gas  sales  agreement  will  upgrade  the  2C  reserves  to  2P reserves .  Production  would  start  in  2016  and  2017 respectively  with  significant  development  cost  of  around US$727m  over  2-5 years in order  to monetise the asset.  

Risks

• Execution risk, escalation of vessel  and fabrication  costs.

Forecasts

• Unchanged  pending  more  production  information  from  the company.

Rating

BUY

Positives

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

Negatives

  –  Increas ed  competition  for  growth  markets   and complexities of running  a larger  organization.  

Valuation

• Maintain  BUY  call  with  an  unchanged  TP  of  RM 4.26  based on  unchanged  16x FY01/16  EPS of  26.6  sen/share.

Source: Hong Leong Investment Bank Research - 21 Nov 2014