News  Yesterday, SapuraKencana Petroleum (SKPETRO) announced that it has; (i) entered into three conditional sales and purchase agreements to acquire interests in Petronas Carigali Overseas’ and PC Vietnam Limited’s assets in Vietnam for a price-tag of USD400m (RM1.3b), and (ii) been awarded two PSCs for onshore Sabah with minimum 2D seismic and drilling commitments that amount to c.USD40m (RM130m).

 The Vietnam fields have producing assets and the transaction is subject to approval of Petrovietnam, the Vietnamese Government; and relevant regulatory approvals. The acquisition is expected to be completed by FYE16.

Comments  We are positive on the purchases as: (i) we understand that the Vietnam fields yield Net 2P reserves of 17.4mmboe to SKPETRO; which implies a fair cost of USD23/mmboe (versus USD28/mmboe during the Newfield). Also the Vietnamese acquisition have producing assets, hence will translate to immediate cash flow which will be utilised to pay off the borrowings that come with the acquisition (100% debt financed), (ii) the onshore-Sabah PSCs are apparently near some prolific fields and this deal is also a symbol of Petronas’ confidence in SKPETRO. SKPETRO and partners are committed to drill three wildcat wells and acquire 600 line kilometres of new 2D seismic data in Block SB331 and Block SB332. We understand any earnings will likely be in 3-years’ time.

 From a balance sheet perspective; the borrowings for the Vietnam fields will spur net gearing up to 1.4x (from 1.3x in 2Q15; but SKPETRO is certain that payback will be swift given strong cash flows from producing asset. The minimum commitment for the Sabah onshore fields will unlikely be too much of a burden in the short-run as it will be staggered over several years.

Outlook  SKPETRO’s energy division now contains a slew of exploration; development and production assets.

 For Newfield projects; targets are to transform the SK310 discoveries to 2P reserves by end-CY14. For now, the resources are estimated to be at 1.5-3.0 tcf.

Forecast  We maintain our forecasts for now; pending completion of the Vietnam acquisition and it is too early to assess potential reserves from the onshore Sabah field.

Rating Maintain OUTPERFORM

Valuation  Whilst we like the diversified nature of SKPETRO, we are cognizant that the oil and gas sector is in a higher-risk scenario given the lower crude oil prices, as such we are reducing SKPETRO’s CY15 PER to 16x (in-line with PERs ascribed to DIALOG (OP; TP: RM1.73) given that we see a sector de-rating in the medium-term.

 Our PER cuts lead to our TP falling to RM4.24 (from RM5.31 previously) based on a CY15 EPS of 26.5 sen.

 Our ascribed CY15 PER is a slight premium to the 15x average forward historical PER for the sector given its diversified service and geographical offerings.

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

 (ii) Lower-than-expected contract replenishment.

Source: Kenanga