THE BUZZ  
Petra Energy (PENERGY) announced on Bursa Malaysia yesterday that it is proposing to undertake a rights issue of up to 107,250,000 new ordinary shares of RM0.50 each at an  issue  price  to  be  determined  later  on  the  basis  of  one  rights  share  for  every  two existing shares held. 

OUR TAKE  
Raising  funds  for  upstream  venture.  We  are  not  surprised  with  the  move  as PENERGY  will  need  fresh  capital  to  fund  its  new  upstream  venture.  To  recap,  Petra Energy  had  on  19  Sep  entered  into  a  conditional  share  subscription  agreement  with Coastal  Energy  to  subscribe  for  a  30%  stake  in  the  Kapal,  Banang  and  Meranti  risk service contract  (Project).  PENERGY's investment portion of the USD320m  (RM980m) contract amounts to USD96m (RM300m) and we note that its current balance sheet will not  be  able  to  fund  such  a  huge  investment.  Hence  the  fund  raising  exercise  makes sense in our view although we do expect more funding via debt at a later stage.

RM160.9m to be raised under maximum scenario. Assuming an indicative issue price of  RM1.50  per  rights  share,  we  understand  that  PENERGY  will  raise  up  to  RM160.9m under  the  maximum  scenario  and  RM102.1m  under  the  minimum  scenario.  The announcement also mentioned that in order to meet the minimum scenario, PENERGY intends  to  procure  written  irrevocable  and  unconditional  undertakings  from  certain substantial  shareholders  (likely  Shorefield  Resources  and  Wah  Seong)  to  subscribe  in full for their respective entitlements.

Strengthening  its  balance  sheet.  Assuming  the  right  shares  are  fully  subscribed,PENERGY's gearing ratio would become net cash immediately after the exercise,  from 0.4x as at 3QFY12. That said, the company will probably still maintain its gearing ratio at 0.4-0.6x as it will invest the cash and incur more debt at a later stage to fund the Project.  

FV  to  be  nudged  down  to  RM1.73  post-exercise.  Assuming  full  subscription  of  its rights  shares,  we  will  likely  switch  our  valuation  method  to  sum-of-parts  (SOP)  to incorporate the potential earnings from its marginal oilfield project. Hence our fair value (FV)  is  likely  to  be  reduced  to  RM1.73  assuming  i)  an  enlarged  share  base  of  321.8m shares, ii) no changes to our net profit forecast (RM29.8m in FY13), and iii) incorporation of  our  free  cash  flow  valuation  (RM0.44  per  share  based  on  our  estimates)  for  its upstream venture. 

Maintain  BUY.  All in,  we  are making no  changes to  our  recommendation  for  now  until the  exercise  is  fully completed.   We  value  the  stock  at  RM1.94, pegged to  the existing 14x FY13 PE. Key rerating catalysts for the stock include i) securing of major contracts under  the  Pan  Malaysia  tender,  and  ii)  securing  an  enhanced  oil  recovery  project, strengthening its upstream venture.

 Source: OSK