THE BUZZ
Petra Energy (PENERGY) announced on Bursa Malaysia yesterday that it is proposing to undertake a rights issue of up to 107,250,000 new ordinary shares of RM0.50 each at an issue price to be determined later on the basis of one rights share for every two existing shares held.
Petra Energy (PENERGY) announced on Bursa Malaysia yesterday that it is proposing to undertake a rights issue of up to 107,250,000 new ordinary shares of RM0.50 each at an issue price to be determined later on the basis of one rights share for every two existing shares held.
OUR TAKE
Raising funds for upstream venture. We are not surprised with the move as PENERGY will need fresh capital to fund its new upstream venture. To recap, Petra Energy had on 19 Sep entered into a conditional share subscription agreement with Coastal Energy to subscribe for a 30% stake in the Kapal, Banang and Meranti risk service contract (Project). PENERGY’s investment portion of the USD320m (RM980m) contract amounts to USD96m (RM300m) and we note that its current balance sheet will not be able to fund such a huge investment. Hence the fund raising exercise makes sense in our view although we do expect more funding via debt at a later stage.
RM160.9m to be raised under maximum scenario. Assuming an indicative issue price of RM1.50 per rights share, we understand that PENERGY will raise up to RM160.9m under the maximum scenario and RM102.1m under the minimum scenario. The announcement also mentioned that in order to meet the minimum scenario, PENERGY intends to procure written irrevocable and unconditional undertakings from certain substantial shareholders (likely Shorefield Resources and Wah Seong) to subscribe in full for their respective entitlements.
Strengthening its balance sheet. Assuming the right shares are fully subscribed,PENERGY’s gearing ratio would become net cash immediately after the exercise, from 0.4x as at 3QFY12. That said, the company will probably still maintain its gearing ratio at 0.4-0.6x as it will invest the cash and incur more debt at a later stage to fund the Project.
FV to be nudged down to RM1.73 post-exercise. Assuming full subscription of its rights shares, we will likely switch our valuation method to sum-of-parts (SOP) to incorporate the potential earnings from its marginal oilfield project. Hence our fair value (FV) is likely to be reduced to RM1.73 assuming i) an enlarged share base of 321.8m shares, ii) no changes to our net profit forecast (RM29.8m in FY13), and iii) incorporation of our free cash flow valuation (RM0.44 per share based on our estimates) for its upstream venture.
Maintain BUY. All in, we are making no changes to our recommendation for now until the exercise is fully completed. We value the stock at RM1.94, pegged to the existing 14x FY13 PE. Key rerating catalysts for the stock include i) securing of major contracts under the Pan Malaysia tender, and ii) securing an enhanced oil recovery project, strengthening its upstream venture.
Source: OSK
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