SapuraKencana Petroleum - Boosting Its Drilling Segment

SapuraKencana (“SKPETRO”) announced that it had entered a non-binding MOU to acquire most of Seadrill’s tender rigs and to manage three others for USD2.9b (c. RM9.0b). We are pleasantly surprised with the news given that we were expecting any large acquisitions to be only after SKPETRO received the delivery of its ongoing newbuilds. Nonetheless, we are positive on the acquisition as it will raise SKPETRO’s dominance on the EPCIC market. We estimate that the exercise could be financed on a 57:43 debt-to-equity structure. Based on our assumptions, a FY14 net profit accretion of 58% is on the cards for SKPETRO. The proposed acquisition is still subject to due diligence and approval from clients of the rigs, and as such, there could still be changes to the financing structure of the exercise. Based on an implied targeted PER of 23.7x, we are tactically raising our target price on the stock to RM3.42 (previously RM2.90). Maintain OUTPERFORM on the stock.

Acquisition transacted at 9x EV/EBITDA and 9.6x PER. This is based on the annualised 2QFY12 EBITDA of USD322m and net profit of USD299.5m (both stripped off of the estimated earnings from West Vencedor that SKPETRO will not control). This  is above the average CY13 EV/EBITDA of 6.6x that its peers (including Transocean, Diamond Drilling and Atwood Oceanics) are trading at, but slightly below the CY13 PER of 9.9x of the same peers. On the overall, we believe that the acquisition price is fair given that Seadrill has predominantly traded at a premium to its peers  (an average of 1.2-1.6x).

Deal expected to be financed on a 57:43 debt-to-equity structure.  We understand that management is looking to fork out around USD900m of cash for Seadrill on top of the minimum USD350m worth of new shares in SKPETRO as announced. As such, we estimate that the debt to equity structure of the exercise could be 57:43. This scenario will potentially result in around 1.5b new shares being raised. 

Dominating the domestic tender rig market.  Post-acquisition, SKPETRO will be in control of 21 tender rigs (18 via Seadrill and 3 via Kencana Petroleum) and possess the rights to manage three more (T15, T16 and West Vencedor). Out of the 18, five are already coowned with SapuraKencana while another three will be delivered on a staggered basis from early-CY13 to end-CY13. Inclusive of the three rigs from Kencana, SKPETRO will be the largest domestic tender drilling fleet owner at 24 rigs. The order backlog of USD1.55b (c.RM4.8b) could raise SKPETRO’s order book to a significant RM19.3b (from RM14.5b).

Plus points from both ends. From SKPETRO’s standpoint, we see this move as a means to strengthen its EPCIC market dominance. Not only does it solidify the company’s standing in the South East Asian (SEA) region, it also opens the doors to new  countries like Trinidad & Tobago, Equatorial Guinea and Angola. From Seadrill’s standpoint, the sale will allow it to free up its own cash for its endeavours in the ultra deepwater operations and also give it exposure to the tender rig movements via its stake  in SKPETRO (expected to be 13% from 6% currently).

FY14 net profit accretion of 58%. On a conservative basis of a 37% net profit margin on its FY14 revenue of RM1.4b (for the new assets) and RM175.5m removed from MI (due to its previous 49% Seadrill stake in five tender rigs), we expect its net earnings to jump to RM1.18b (from RM744.3m). Post–dilution (with the new rights), CY13 EPS will increase by 18.3% to 17.1 sen (from 14.5 sen). We would like to highlight that we have not imputed in any income expected by management from the other three rigs. We would also like to highlight that SKPETRO’s gross gearing will increase to 1.2x (from 0.9x previously) after the acquisition but this will still be within its comfort zone of 1.25x.

Tactically raising target price to RM3.42. The MOU is still subject to changes and as such, we are maintaining our earnings estimates at this juncture until it becomes binding. However, given that we expect the market to react positively to the stock, we are tactically raising our PER target to 23.7x, leading to an increase in our target price to RM3.42 (from RM2.90) (see below for details). We maintain our OUTPERFORM call on SKPETRO.  

Source: Kenanga