Wah Seong Corporation - Petra Energy in RSC talks with Coastal Energy BUY

- We maintain our BUY call on Wah Seong Corporation, with an unchanged sum-of-parts-based fair value of RM2.35/share, which implies a rolled-forward FY13F PE of 14x – an 18% discount to the oil & gas sector’s 17x for stocks with a market capitalisation of over RM1bil.

- The Edge Financial Daily reported today that Wah Seong’s 27%-owned Petra Energy is in talks with Coastal Energy, listed in Toronto and London, to participate in a risk service contract (RSC) for the development of marginal oilfields in Kapal, Banang and Meranti, offshore Peninsular Malaysia. 

- Recall that Wah Seong recently acquired the Petra Energy stake from Perdana Petroleum at RM1.68/share or RM97mil cash, which was at a 9% premium to Petra Energy’s closing price.

- Coastal Energy, which has a market cap of RM5bil, has also announced that it is currently finalising an arrangement for a Malaysian company to participate in an equity interest of 30%-40% for the small field RSC. This will be the third small field RSC which Petronas has awarded, after Berantai to the Petrofac-SapuraKencana joint venture and Balai to the RocOilDialog-Petronas Carigali consortium. 

- But Upstream has also reported that the RSC award to Coastal Energy is for the Tembikai field, off Peninsular Malaysia. Coastal Energy’s current asset base is in Thailand with two offshore concessions – G5/43 and G5/50, in the Gulf of Thailand and four onshore concessions in the Khorat Plateau in northeastern Thailand. 

- Petra Energy, an integrated brownfield services provider for the upstream oil & gas industry, offers maintenance and engineering services for offshore platforms, onshore civil engineering, marine offshore, design/fabrication, supply and installation services. 

- According to Upstream, the costs of development could reach up to US$1bil, similar to the Berantai and Balai projects. This will mean that Petra Energy will have to secure funding of up to RM370mil for this RSC project, assuming a debt:equity structure of 70:30. This could raise Petra Energy’s net gearing ratio from 0.4x currently to an uncomfortably high  1.4x. Hence, we would not be surprised if Petra Energy were to propose an equity raising exercise via a rights issue.  

- While an RSC project should be DCF and EPS accretive to Petra Energy over the long term, Wah Seong may need to inject further cash to maintain its stake in Petra  Energy, should a rights issue materialises. For now, we are neutral on this development.

- The stock currently trades at an attractive FY13F diluted PE of 11x, but uncertainties over the group’s 470,000ha oil palm plantation investment in the Republic of Congo could continue to cap interest in the near term.   

Source: AmeSecurities