SapuraKencana Petroleum - Value-accretive rig acquisitions from Seadrill BUY

- We upgrade our recommendation on SapuraKencana Petroleum (SapuraKencana) from HOLD to BUY, with a raised fair value to RM3.70/share (from an earlier RM2.60/share), which is pegged to an FY14F PE of 20x– 10% above the oil & gas sector’s 18x currently.

- We raised SapuraKencana’s FY14F-FY15F EPS by 24%-30% from the value-enhancing injection of 10 tender-assisted rigs (TAGs) plus a 49%-stake each in five TAGs, partly offset by a 7% increase in share capital. 

- SapuraKencana has entered into a non-binding memorandum of understanding to acquire Seadrill’s tender rigs  which comprise 10 wholly-owned TAGs, five 49%-owned TAGs and 2 TAGs under construction for an enterprise value of US$2.9bil (RM9bil), which will be settled by the issuance of  new SapuraKencana shares (US$350mil), US$1.4bil borrowings and assumption of US$800mil debt. 

- While management has not provided guidance on the financial performance of the TAGs, our forecasts assume that  the charters are similar to the group’s current 5 units in JV with Seadrill with a pre-tax margin of 40%, which translates into an acquisition FY14 PE of 11x vs. the group’s FY13F PE of 22x currently. Hence, this deal is accretive to forward EPS.

- The new TAGS come with an order backlog of US$1.6bil (RM4.8bil), which will propel the group’s already massive order book by 32% to RM20bil – the largest in the oil & gas sector. This acquisition will radically expand the group’s TAG fleet from 6 currently to 24 - including 5 under construction and 3 under management for Seadrill. This accounts for 55% of the world’s current TAG fleet of 33. 

- This exercise, which is expected to be completed before 1QFY14, will raise Seadrill’s strategic stake from 6% to 13% and lead to two board representations, which we understand may include Seadrill’s founder and major shareholder John Frederickson. This will assuage investor concerns that Seadrill may be planning to dispose of its stake in SapuraKencana.

- This exercise will further fortify the strategic alliance with Seadrill in expanding the group’s global footprint, particularly in Brazil where SapuraKencana is hoping to jointly bid for 3 additional pipe-laying support vessels, in addition to the current 3 under construction.

- While the newsflow for local domestic fabrication contracts are temporarily slowing down, SapuraKencana’s forward earnings momentum has re-ignited with this new asset injections and dissipating concerns over a potential stock selldown by Seadrill. After our earnings revision, SapuraKencana’s valuations are currently attractive at an FY14F PE of 15x, which is at a 17% discount to the sector’s PP 12247/06/2013 (032380) 18x for O&G stocks with a market capitalisation above RM1bil.  

Source: AmeSecurities