Friday, November 16, 2012

SKPetro ... Nov12

It has secured two new contracts a RM700mil underwater services contract (inspection, repair and maintenance) from Petronas Carigali for 3 years effective October 2012 and a RM136mil well-head platform fabrication job from Hess for the North Malay Basin project's early production system, to be completed by the first quarter of 2013. SapuraKencana had been the frontrunner for these projects, given its lead in fabrication, drilling, offshore support, underwater and installation services.

SapuraKencana has secured about RM4bil worth of new wins year-to-date (Nov 2012), taking its order book to RM15.3bil, the highest in Malaysia's oil and gas industry. This will provide strong earnings visibility for the next three years from 2012.

More contracts may be awarded over the next few months from Nov 2012 after a lull in the first half of 2012. SapuraKencana remains the clear favourite for Petroliam Nasional Bhd's (Petronas) tenders, given its established integrated services.

Its strong RM25bil tender book also indicates healthy contract replenishment in the pipeline.

There are more re-rating catalysts on the horizon arising from Petronas' capex spending.

Meanwhile it has proposed to acquire the tender rig business, of Seadrill Ltd for US$2.9 billion, a deal that would position it as the world’s largest owner of such oil and gas assets and increase the Norwegian company’s interest in the Malaysian listed entity of almost 13%.

Under the proposed transaction, SKPetro would acquire 10 tender rigs wholly owned by Seadrill, acquire the remaining 49% equity interest in the existing five rigs and in 2013 take delivery of three rigs that are currently (Nov 2012) under the construction. This would bring the number of rigs in its stable to 22 making it the world’s largest owner of tender rigs.

Seadrill will be paid in shares worth US$350 million – in an exercise that will see its interest increase from 6.4% stake to almost 13% stake. This would put the company almost on par with SKPetro second largest shareholder, Datuk Mokhzani Mahathir. SKPetro will fund the balance of the US$1.39 billion through a mix of bank borrowings and a seller’s note of US$187 million.

Seadrill will, to support this position, receive a minimum of US$350mil in new shares of SapuraKencana. This comes in addition to the 6.4% stake that Seadrill presently owns in SapuraKencana.

Seadrill is disposing of the tender rig business in return for a bigger stake in the holding company. It is going into assets that are used in ultra deep water drilling. As for SKPetro, this is an opportunity to increase its asset size within a minimal space of time.

The biggest plus point for SKPetro is that John fredriksen, the chairman of and president of Seadrill will sit on the board of SLPetro. He rarely sit on the boards of companies outside his stable.

After the exercise, Seadrill’s strategic stake will raise from 6% to 13% and lead to two board representations, which 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 SKPetro.

This exercise will further fortify the strategic alliance with Seadrill in expanding the group’s global footprint, particularly in Brazil where SKPetro is hoping to jointly bid for three additional pipe laying support vessels in addition to the current (Nov 2012) three under construction.

While news flow for local domestic fabrication contracts is slowing down (Nov 2012), SKPetro’s forward earnings momentum has re ignited with this new asset injection and dissipating concern over a potential stock selldown by Seadrill.

Both companies had entered into a non-binding memorandum of understanding to combine and integrate both companies' tender rig businesses. The enlarged tender rig business under SapuraKencana would comprise, 16 tender rigs in operation, and an additional five units currently under construction.

In addition SapuraKencana would also be offered the right to be the manager for three further tender rigs which are not part of the transaction.

The operating rigs and the newbuilds were currently contracted under long-term fixed price contracts with Chevron, Shell, PTTEP, and Petronas Carigali.

The total order backlog amounts to US$1.55bil as of end of October 2012. The majority of the operating rigs are currently deployed in Southeast Asian waters. Of the 15 operating rigs, nine are barges and six are semi-tenders, which are capable of operating in water depths of up to 6,500 feet.

One of the main objectives of the transaction is to develop a strong leading player in the Far East market.

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