SapuraKencana Petroleum - (New)field-good factor

Target RM6.73 (Stock Rating: ADD)

SapuraKencana's acquisition of Newfield's assets in Malaysia could be completed as early as mid-Feb 2014 following Bank Negara's approval. The potential early completion of the acquisition is a pleasant surprise as we had expected the acquisition to be finalised by around Apr 2014. Furthermore, management remains keen on Newfield's assets in China. We continue to value the stock at 22.5x CY15 P/E, a 40% premium over our implied market target of 16.1x, but still within the historical P/E range of the oil & gas big caps. We maintain our Add call, with the Newfield purchase and strong order book momentum as major rerating catalysts. SapuraKencana remains a high conviction call and our top pick among the oil & gas big caps.

What Happened 

SapuraKencana announced that it has received an approval from Bank Negara to proceed with the proposed borrowings to finance the US$898m acquisition of Newfield's assets in Malaysia. This suggests that the acquisition could be completed in mid- to end-Feb 2014, at the earliest. Separately, in a recent communication, management reiterated its interest in Newfield's assets in China and plans to participate in the tender when the assets are put up for sale again. The sale of the assets has been delayed due to equipment failure at one of the two fields. See overleaf for more updates, including debt refinancing and marginal field venture. 

What We Think 

We are pleasantly surprised by the potential early completion of the Newfield acquisition as we had expected it to be finalised around Apr 2014. An early completion could allow SapuraKencana to book the Newfield contributions for the full FY1/15 effective 1 Feb 2014, as opposed to 1 May 2014 per our forecast, potentially raising our FY1/15 EPS by 3%. We maintain our forecasts for now. We are also encouraged that the China assets are still on the table. We think that SapuraKencana may have an advantage over the other potential competitors as the assets in China were managed by the 200-strong Newfield team in Malaysia. 

What You Should Do 

Accumulate the stock and ride SapuraKencana's strong earnings thrust brought about by the Newfield and Seadrill acquisitions, the main drivers behind the stock's 3-year EPS CAGR of 43%, which is almost double the sector average of 22%.

Source: CIMB Daybreak - 29 January 2014, Full PDF Report