SapuraKencana Petroleum; Buy; RM4.08
Price Target: RM4.85; SAKP MK

SapuraKencana has entered into a conditional share purchase agreement to buy all of Newfields International Holdings Inc’s equity interest in Newfield Malaysia Holdings for a total consideration of US$898m (RM2.85bn).

Newfield Malaysia Holdings’ assets include interests in nine production sharing contract (PSC) blocks spread across Peninsula Malaysia, Sabah and Sarawak: i) 50% interest in Block PM318; ii) 60% in PM323; iii) 70% in PM329; iv) 50% in AAKBNLP; v) 30% in SK310; vi) 40% in SK408; vii) 50% in New Oil Production and New Facilities in Tembungo; viii) 40% in Block 2C; and ix) 25% in Block SK319. The acquisition is subject to approval from shareholders and Petronas, and is scheduled for completion in 1Q15.

The acquisition will allow SapuraKencana to strengthen its upstream business. The Group will:- i) gain access to proven and probable resources of 36mmboe with estimated production of 23,000 bbl/day; ii) own an entity already operating in the offshore environment; and iii) benefit from Newfields proven operational track record. Overall, this transaction will strengthen and diversify SapuraKencana’s existing portfolio of assets and services.

However, the earnings impact will be dependent on several factors which are unclear at this juncture. This includes the following:-

(1) Under the agreement, the production sharing contract (PSC) partners of the target acquisition companies would be offered preferential rights to acquire the assets of Newfield Malaysia Holdings. In the event a PSC partner exercises their preferential rights for a particular asset, there would be adjustments to the purchase price;

(2) The concession period and development schedule of the assets;

(3) The fair value of the assets which will determine goodwill and subsequently amortization. We note also that the profitability and gearing position of the target acquisition have not yet been disclosed. The acquisition will be funded by a combination of internally generated funds and bank borrowings – SapuraKencana’s net gearing is currently 1.07x. Assuming 75% of the consideration is debtfunded, we estimate net gearing will rise to approximately 1.30x.

At this stage, we maintain our earnings forecast, BUY call and RM4.85 TP.

Source: HwangDBS Research - 23 Oct 2013