SapuraKencana Petroluem - Seadrill halves equity stake, but JVs intact BUY

- We maintain our BUY call on SapuraKencana Petroleum (SapuraKencana), with an unchanged fair value of RM2.68/share, pegged to an FY13F PE of 22x (excluding one-off merger costs of RM131mil), a 10% premium to an average of 20x currently for oil & gas stocks with a market capitalisation of over RM5bil. 

- Norway-based Seadrill has sold 300mil shares or a 5.4% equity stake in SapuraKencana for RM636mil or RM2.11/share. This halved Seadrill’s equity stake from 11.8% to 6.4%. In our view, the partial sale of Seadrill’s equity stake should improve SapuraKencana’s stock liquidity with the free float rising from 48% to 54%, as the inclusion of SapuraKencana in the MSCI Emerging Market and Asia Pacific indices will  draw further foreign institutional support.

- Recall that Seadrill, well-known for its global offshore drilling services, has a 49% stake in five of SapuraKencana’s tender rig operations, which are mainly operating off Malaysia. Seadrill had taken an earlier 24% stake many years ago in SapuraCrest Petroleum, which was merged into SapuraKencana last month.

- Seadrill currently also has a 50% stake in a joint-venture with SapuraKencana to own, manage and operate three flexible pipe-lay support  vessels for a RM1.4bil Petrobras contract in Brazil’s pre-salt offshore fields. We understand SapuraKencana’s 50%-owned joint venture with Seadrill is eager to participate in Petrobras’ next batch of seven flexible pipe-lay vessels. Seadrill’s chairman John Fredriksen said that it will remain as one of the largest shareholders of SapuraKencana, with the sale of shares being part of its strategy to realise its gain on investments and use the proceeds for its own drilling business. 

- We continue to be positive on SapuraKencana, as its JVs with Seadrill is still intact. Its estimated tender book of RM11bil will continue to drive the group’s earnings prospects. Domestically, we expect SapuraKencana to benefit from fresh news over the next few months from Petronas’ RM15bil fast-tracked programme for the North Malay basin, off Peninsular Malaysia, as well as other enhanced oil  recovery jobs in East Malaysia and additional marginal field concessions.

- SapuraKencana’s valuations are compelling at an FY13F PE of 18x compared with SapuraCrest’s peak of 29x back in 2007. 

Source: AmeSecurities