News  Sapurakencana Petroleum (SKPETRO) announced that it had entered into a conditional sale and purchase agreement with Newfield International Holdings Inc. to acquire nine oil fields currently owned by the latter.

 The total purchase price is up to USD898.0m (c.RM2.8b) for the oil fields in Malaysia which are producing 23,000bbl of oil per day.

 The proposed transaction is expected to be completed in the first quarter of 2015.

Comments  We are positive on the development as SKPETRO is moving up the value chain in the oil and gas sector but there are slight concerns with regards to their ability in this segment being their maiden venture into the riskier upstream activities.

 According to Newfield’s FY12 Annual Report, its Malaysia operations made a net profit of USD239m in FY12 (Dec year end) on the back of USD1.01b revenue while discounted future net cash flows was USD416m.

 This acquisition is expected to be financed through internally generated funds and external borrowings. We will not be surprised if SKPETRO is to issue sukuk to finance the acquisition as they intend to maintain their Shariah-compliant status for the stock.

 As of 2Q13, SKPETRO’s net gearing stands at 1.1x. Assuming that 90% of the purchase price is funded by borrowings and no excess cash from Newfields post acquisition, we expect the net gearing ratio to increase to 1.4x.

Outlook  SKPETRO’s current order book stands at RM24.8b (from ~RM26b in Aug-13). Tender book is guided to be within RM24b.

 One of the jobs that the OCSS division is currently awaiting is the Pan-Malaysia Transport and Installation (T&I) contract which SKPETRO foresees will be awarded by end-2013 to

 The Fab & HUC division could continue to be weak in the near term given that contracts have been slow to come by.

SKPETRO believes the Samarang project will be awarded by late 2013. However, we also understand that SKPETRO is supplementing the division by embarking on some Indian EPCC bids.

 On RSCs, SKPETRO admitted that it was bidding for 2-3 deals, however, there was no guidance in regards to which ones they were eyeing.

 SKPETRO guided it is also assessing debt restructuring options given the impending Shariah compliance rulings which will be effective this coming Nov-13. For now, we believe SKPETRO’s conventional loans over total debts are above the 33% threshold which SKPETRO has a 6-month grace period to comply.

Forecast  We are keeping our forecast for now, pending a meeting with management for further updates on this acquisition.

Rating Maintain OUTPERFORM

Valuation  Our target price of RM4.72 is based on an unchanged target PER of 22x on its CY14 EPS of 21.4 sen.

Risks to Our Call  (i) Lower-than-expected margins for business segments

 (ii) Lower-than-expected contract replenishment.

Source: Kenanga