SkPetro ... Jan13

There are caution over SapuraKencana Petroleum Bhd's US$2.9bil (RM8.09bil) proposed Seadrill Ltd rig acquisition given that the company's gross borrowings could double from the current RM5.9bil.

RAM Ratings has placed the company's proposed acquisition under watch. The rating agency's caution is valid due to the size, gearing and financing of the deal perspective. The acquisition value is almost 60% of SapuraKencana Petroleum's market capitalisation.

SapuraKencana Petroleum is a merger between SapuraCrest Petroleum and Kencana Petroleum, which created Malaysia 's largest oil and gas service provider.

The US$2.9bil purchase included US$1.74bil (RM5.33bil) in the equity value and US$1.16bil (RM3.57bil) in current debt.

SapuraKencana Petroleum is buying the rigs business, including the full tender rig organisation, from Seadrill for an enterprise value of US$2.9bil.

Seadrill will receive a minimum of US$350mil (RM1.07bil) in new shares of SapuraKencana Petroleum that will double Seadrill's stake in the company to 13% from the current 6.4%. The remaining consideration will be funded by SapuraKencana Petroleum through a mix of external borrowings, a seller's note of up to US$187mil (RM874.09mil), internally generated funds and equity.

This exercise instantly transforms SapuraKencana Petroleum into the largest tender-assisted rig operator in the world, by fleet size. This is an earnings accretive deal.

By buying Seadrill's 10 existing tender and semi-tender rigs, three others that are under construction and the remaining 49 per cent stake in the five rigs that are jointly owned by it and Seadrill, SapuraKencana will control 51 per cent of the global tender rig business. This will make it the undisputed leader with its next closest competitor globally having four tender rigs. (Tender rig is a specialised barge that can carry a set of drilling equipment and accommodate personnel. These rigs service the production side of the industry).

Before announcing the Seadrill deal, SapuraKencana already has a RM4 billion capex (capital exexpenditure) in place to build up its might and assets over the next three to five years from 2012. The drilling business, which now (Dec 2012) accounts for 20 per cent to 25 per cent of group profits, will shoot to some 40 per cent with the Seadrill assets. But over time, as other non-drilling activities grow, contribution from the drilling operation will ease to under 40 per cent.

The Seadrill assets come with a lucrative US$1.55 billion orderbook lasting three to five years from 2012.  This will expand SapuraKencana's orderbook by 30 per cent to more than RM19 billion and transform its earnings landscape to a recurring high margin business. The drilling segment could contribute more than 50 per cent to the group's bottomline, up from 22 per cent currently (Dec 2012).

SapuraKencana's significant scale, service range and established global track record make it one of the main beneficiaries of the domestic upstream opportunities, while its longstanding relationship with international heavyweights opens doors to global opportunities.

As at end-October 2012, SapuraKencana's order stood at about RM13.5 billion, which is way bigger than other local heavyweights such as Bumi Armada Bhd (about RM7 billion) and Malaysian Marine and Heavy Engineering Bhd (RM2.8 billion). Even excluding the longer term Petrobras contract worth RM4.3 billion, which will only kickstart by end-2014, SapuraKencana has the largest domestic order backlog.

Year-to-date (Dec 2012), it has locked in RM4.1 billion of wins, a significant sum when compared to other big peers.

Meanwhile the completion of SapuraKencana Petroleum Bhd's impending acquisition of Seadrill Ltd's US$2.9 billion (RM8.87 billion) tender rig business could enhance its 2014 earnings forecast by 22.6 per cent.

If the deal was successful, SapuraKencana Petroleum would, in the long run, inherit an existing orderbook of US$1.6 billion (RM4.9 billion), capitalise on Seadrill's expertise and expand deepwater customer base in East Asia.

The group will be able to further expand its presence in the lucrative Brazil market by virtue of its upcoming partnership with Seadrill.

SapuraKencana's strong orderbook of RM13.5 billion as at the end of October 2012, beefed up with steady replenishments in all its business segments, would provide the group with a healthy stream of revenue.

Catalysts include the impending acquisition and potential rerating if the group were able to bag more jobs in 2013.