News

Seadrill Limited (Seadrill) announced today that it has sold its remaining stake of approximately 490m shares or equivalent to 8.2% of its remaining stake in SKPETRO for approximately USD195m.

The proceeds from the share sale will provide additional liquidity and will be used for general corporate purposes.

Comments

We gather that the transaction is done through book-building exercise at the price of RM1.58, implying a discount of 10.7% to the last traded price of RM1.77. The takers consist of both foreign and domestic investors.

We think this is slight negative to SKPETRO at this juncture as Seadrill has always been deemed to be a strategic partner of SKPETRO.

The sale of SKPETRO shares near the historical low is not entirely surprising given Seadrill is facing pressure to conserve cash.

Looking at Seadrill’s latest financial statements, we reckon that the company is currently in a relatively stretched position in terms of gearing and cash flow. The cash pile of USD1.04b is insufficient to pay off the ST borrowings and operating cash flow is likely to weaken in view of industry slowdown which is expected to persist.

Previously, Seadrill had raised USD300m from the sale of 230m shares of SKPETRO, bagging a gain of USD165m in April 2014. This was at an implied selling price of RM4.20/share assuming an exchange rate of RM3.22/USD.

We believe Seadrill recorded a loss of USD11m as the book value stood at USD206m as at 31 December 2015. Recall that the book value was impaired from USD373m in September 2015 meaning that the original investment cost was much higher.

Outlook

We believe margin erosion is a concern in all three segments in the near-term even with oil prices recovering to USD50/bbl as most oil majors are still in aggressive cost optimisation mode. (Refer overleaf for more details.)

Forecast

No changes to our forecast for now pending further guidance from management on the impact of Seadrill’s exit.

Rating

Maintain MARKET PERFORM

Valuation

We maintain our TP at RM1.93 pegged to an unchanged CY17 PER of 14x, which is in line with O&G big caps’ down-cycle valuation.

Risks to Our Call

Lower-than-expected margins for business segments.

Lower-than-expected contract replenishment.

Source: Kenanga Research - 28 Apr 2016