SapuraKencana Petroleum - Seadrill Acquisition Details Released

News    SKPETRO announced the financing structure of the Seadrill tender-rig purchase last week. 

 The USD1.74b purchase consideration will be fulfilled in the following manners: 1) USD350m via 400.8m shares priced at RM2.70; 2) up to USD238m via 3-year redeemable exchangeable preferences shares (REPS) in SKPETRO at an issue price of RM2.70 per REPS; 3) USD187m worth of sellers notes to Seadrill; 4) USD250m via private placement at a price yet to be determined and 5) balance via debt.

 A further placement of up to 300m new shares will be implemented in tranches to investors in the event of the redemption of REPS from Seadrill. 

 The completion of the deal is expected to be by 2QCY13 as such SKPETRO’s FY13 Jan earnings will not be impacted.               

Comments   The Seadrill issuance and base placement will lift SKPETRO’s share base by 13%-14% to 5.67b-5.69b shares from (5.0b shares currently). Whilst the further additional placement to cover the redemption of the REPS will  lift share base by another 4.7%-4.8% to 5.94-5.96b shares, the enlarged share base is still below our previously estimate of 6.5b shares.  

 In terms of debt, the financing structure above implies around RM2.2b of debts. This, including the USD800m debt to be assumed after the acquisition and the USD363m future capex brings cumulative debt to RM5.7b, slightly above our previous assumed debt of around RM5.0b. 

 Before the proposed additional placement, Seadrill’s stake in SKPETRO will be 12.6% (from current 6.39%); whilst gross gearing could increase to 1.5x (versus current 0.9x).

Outlook   This tender-rig acquisition will make SKPETRO a market leader in the space. 

 Coupled with its already strong presence and scale in the domestic EPCIC market, SKPETRO is likely to be a strong contender for works in the upstream oil and gas sector.

Forecast   We are maintaining our FY13-14 net profit estimates of RM496.3m and RM744.2m for now pending the completion of the proposal. However, we are changing our borrowing costs and new share base to be in-line with the financing structure proposed. We have opted for the more aggressive route and assumed that the future capex will be funded via borrowings pursuant to the acquisition.

 This leads to higher CY13 EPS of 20sen (versus 17sen previously).

Rating  Maintain OUTPERFORM

Valuation    Fair value is raised to RM3.82 (from RM3.42 previously) based on an implied PER target of 26.5x. We are tactically raising our target price to accommodate the potential  earnings accretion from the new rigs of SKPETRO post its acquisition exercise with Seadrill and the assumed debt.

 Premium valuations are accorded to the stock 18.0x  for MMHE) due to its significant domestic market dominance and service scale range.

Risks   1) High capex plans of the company could strain growth prospects and 2) Delay in contract executions could result in a lower-than-expected earning.  

Source: Kenanga