SAKP’s  management  told a conference call  that  the group’s acquisition of Newfield International Holdings’ nine upstream assets in Malaysia for USD898m  (c.  MYR2.85bn)  will  be  earnings-accretive,  with  a  30-35% projected  IRR.  SAKP  will  assume  no  debt  from  the  proposed acquisition,  while  the  producing  fields  are  self-sustaining  and  require minimal capex. Maintain BUY, with MYR4.96 FV, implying a 24% upside.

• Value-accretive  acquisition.  The  oil  fields  are  expected  to  last  7-9 years  while  the  gas  reserves  may  be  producing  for  10-20  years. SapuraKencana Petroleum (SAKP)’s  management is looking to sustain the historical USD150m-200m annual profit contribution, which implies 5-6x  P/Es  for its acquisition price. The natural decline in oil production is likely  to  be  mitigated  by  enhanced  oil  recovery  to  optimise  oilfield production.  We  understand  that  SAKP  will  retain  Newfield’s  existing personnel post-transaction.   
• Attractive upstream venture.  The deal  is expected to be completed by Jan  2014,  thus  allowing  SAKP  to  book  the  fields’  accrued  economic interest  from 1 July 2013 onwards.  The producing fields may  potentially boost our FY15F-16F earnings by 36-32%, assuming the historical profit contribution is maintained.
• Net gearing to  go up.  SAKP will be funding 10-20% of the acquisition price  via internal funds and the rest with borrowings. This is expected to increase  its  net  gearing  to  1.3x  at  end-FY14F  (from  1.1x  as  at  July 2013).  Management  is  looking  to  refinance  its  borrowings  of  about MYR13bn-14bn in order to comply with Shariah requirements.
• A  giant  in  the  making.  SAKP  would  have  to  incur  an  estimated USD600m  capex for the SK310  field  (30% stake,  USD1.7bn total cost) and  SK408  field  (40%  stake,  USD217m  total  cost),  which  would  be spread  over  2-5  years  during  the  fields’  development.  It  may  also  be keen to  bid  for Newfield’s China assets,  although these are significantly smaller than those in Malaysia. We believe that this is an opportune time for  the group  to move up the value chain  and provide it with the platform to transform into a truly global O&G player.

Recommendation Chart

Source: RHB