SAKP has entered into a conditional sale and purchase agreement (SPA) with Newfield International Holdings Inc to acquire 100% of the latter’s nine upstream assets in Malaysia for USD898m (c. MYR2.85bn). The deal, expected to be completed in 1Q15, will propel SAKP into one of Malaysia’s largest oil producers, with a 4% market share. Maintain BUY, with RM4.96 FV, implying a 22% potential upside.

- Fully integrated oil major in the making. The proposed acquisition will springboard SAKP to becoming an established upstream owner/operator with 36m barrels of oil equivalent (mmboe) of proven and probable (2P) reserves. The assets’ current oil production stands at an estimated 23k barrel/day. The conditional SPA also underscores SAKP’s credentials as an up-and-coming global O&G integrated player, having outbid the likes of Exxon Mobil and Shell.

- Immediate accrual of economic benefit. The purchase price will be adjusted accordingly if Newfield’s production sharing contracts (PSC) partners exercise their preferential rights to acquire some of the assets. Nevertheless, the economic benefits of the fields will accrue to SAKP effective 1 July 2013. The acquisition may result in the group’s FY16 net gearing rising to 0.8x (from 0.6x) in the unlikely event of holding companies of Newfield’s upstream assets having zero borrowings.

- Potentially strong earnings boost in FY16. Our back-of-the-envelope calculation estimates that the existing producing fields could lift SAKP’s FY16 earnings by 20% (MYR300m), assuming a 12% net margin and USD100/barrel oil price. However, we understand that a natural decline in the fields’ production may reduce its future profitability. We maintain our forecasts for now, pending further clarification with the management.

- Maintain BUY. We continue to like SAKP’s unrivalled integrated offshore services, which will make it the largest beneficiary of Petronas’ unprecedented 5-year capex spending of MYR300bn. Reiterate BUY, with MYR4.96 FV, pegged to 22x FY15 EPS.

Source: RHB