THE proposed purchase by SapuraKencana Petroleum Bhd of interests in several oilfields in Vietnam from Petroliam Nasional Bhd (Petronas) is seen favourably by analysts in the oil and gas sector, who say the price tag of US$400 million (RM1.3 billion) is attractive even in a low oil price environment.

In an announcement last week, the group says it had proposed to acquire a 50% stake in Blocks 01/97 and 02/97 (known as Cuu Long Basin), 36.8% in Block 46-CN (Cai Nuoc), and 40% in Blocks 10 and 11.1 (Nam Con Son Basin). The first two are oil and gas producing blocks while the third is an exploration block.

Petronas is said to have put its stakes in the three blocks up for sale earlier this year. After the international bidding exercise, SapuraKencana entered into three conditional sales and purchase agreements with the national oil firm with regard to the assets.

The Vietnam assets are estimated to have further upside as SapuraKencana will be able to ramp up production in the fields located in Cuu Long Basin as well as potentially make discoveries in the exploration field at Nam Con Son Basin.

SapuraKencana president and group CEO Tan Sri Shahril Shamsuddin says in a statement that the transaction gives the group an immediate foothold in the promising oil provinces off the shores of Vietnam, with cash generating assets that will be earnings accretive to the group.

He adds that the acquisition of interests in the three blocks marks a significant milestone for the group as it further strengthens its presence in Vietnam by adding exploration and production operations to its existing service operations.

The values of the assets were first estimated by Wood Mackenzie, a firm that assesses oil blocks. In July, Wood Mackenzie released a report assessing the worth of only two fields in one of the blocks in the aforementioned Vietnam assets.

The firm estimated that the Thang Long and Dong Do fields located in Block 01/97 and 02/97 will contribute total company cash flow of about US$480 million across a period of 12 years (from 2014 to 2025). The production sharing contract (PSC) concession for this block ends in 2028.

However, the US$480 million, which will be pocketed by SapuraKencana, is only half of the deal. The Cuu Long Basin, where the Thang Long and Dong Do fields are located, also has another field called Ho Xam South.

Wood Mackenzie did not take into consideration Ho Xam South or the other two blocks — Cai Nuoc and Nam Con Son Basin — since at the time of publication, the fields were either not producing or did not have concrete details.

The Cuu Long Basin appears to be the gem in the asset as it has three oil-producing fields — Thang Long, Dong Do and Ho Xam South. The fields were producing about 8,800 barrels of oil per day (bopd) in September and have total reserves of about 43 million barrels. In 2015, production is expected to be ramped up to 18,000 bopd.

As for Cai Nuoc, it is a smaller field with less production. It is currently producing about 900 bopd and 23 million standard cu ft per day of gas. The field has been producing since 2003 and the PSC will expire in August 2015. An extension is subject to negotiation between SapuraKencana and Vietnam’s national oil firm PetroVietnam.

Meanwhile, the potential discoveries and production of Nam Con Son Basin, which is an exploration field, are yet unknown, although some prospects have been identified. Assuming that SapuraKencana makes a discovery, it could add more worth to the total asset.

The acquisition of the Vietnam assets contributes further to SapuraKencana’s already increasing reserves and resources.

At the start of the year, SapuraKencana had reserves and resources of about 104 million barrels of oil equivalent (mmboe). After the five discoveries in SK408 announced in September, its reserves doubled to 208 mmboe. The integration of the Vietnam assets will now see SapuraKencana having total reserves and resources of 225 mmboe.

Additionally, since the Vietnam assets are already producing oil, SapuraKencana is also expected to see its cash flow increase with time.

According to Kenanga Research’s Cezzane See, “the Vietnamese acquisition has producing assets, hence will translate into immediate cash flow that will be utilised to pay off the borrowings that come with the acquisition, which is 100% debt financed”.

From a balance sheet perspective, See says the borrowings for the Vietnam fields will spur net gearing, but SapuraKencana is certain that payback will be swift given strong cash flows from the producing assets.

See has given the stock an “outperform” rating with a target price of RM4.24.

Maybank IB Research is of the view that the Vietnam blocks are quality assets as they are in production, and has given the stock a “buy” recommendation and a target price of RM3.80. In a research report, it says the assets offer immediate cash flows and earnings visibility of about US$200 million earnings before interest, taxes, depreciation and amortisation (Ebitda) per annum over the next seven years.

SapuraKencana’s share price closed at RM3.11 last Friday, giving it a market capitalisation of RM18.64 billion.

Previously, Petronas’ Vietnam assets were speculated to have attracted big names such as tycoon Ananda Krishnan’s Pexco Group and Tan Sri Mokhzani Mahathir.

In the May 22 issue of The Edge, sources said that Ananda was mulling over the listing of Pexco on Bursa Malaysia, should he acquire Petronas’ assets in Vietnam. Pexco is owned by Ananda’s privately held flagship, Usaha Tegas Sdn Bhd.

Meanwhile, The Edge also reported that talk of Mokhzani’s interest in the assets stems from Yinson Holdings Bhd having a strong presence in Vietnam. Through investment vehicle Kencana Capital Sdn Bhd, Mokhzani currently holds an 18.5% stake in Yinson.

This article first appeared in The Edge Malaysia Weekly, on November 24 - 30, 2014.

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