A good entry level, limited downside
The recent share price correction following Seadrill’s exit from SAKP is an opportunity to accumulate and trade on valuations (oversold, undervalued), beta and potential catalysts. Unlocking and monetising its gas reserve is high on SAKP’s agenda, a major catalyst not factored in by the market yet. Our unchanged SOP-based TP offers a 26% upside.
Seadrill’s exit addresses overhang concern
The sale of Seadrill’s remaining 490m shares of SAKP at MYR1.58/shr led to the exit of Seadrill as a passive shareholder. Seadrill still has a 50:50 JV with SAKP on the 6 PLSV units in Brazil. Seadrill’s shareholding exit from SAKP is not entirely unexpected, from an investment perspective. We estimate its average holding cost in SAKP (since its SapuraCrest days) to be MYR1.49/shr (post dividends). This block sale by Seadrill improves SAKP’s free float and liquidity, and it also addresses the share overhang concern that undermined SAKP in the past.
Catalysts: New gas finds & monetisation of gas assets
While SAKP’s energy division is expected to see red in FY17, we do not foresee much of an impairment risk. Its E&P production EBITDA breakeven is USD35/bbl. The unlocking of value of gas reserves from its SK408 field is high on its agenda, discounted by the market for now. Turning its 2C gas reserves (Field Development Program) to 2P status (Gas Sale Agreement) will lift the Group’s NPV. We do not discount additional new gas discoveries from its existing exploration activities at 5 wells at SK408 field that will lift its gas reserves level beyond its current 6tcf.
Opportune time to accumulate
We see values emerging from the recent fall in share price (19% YTD), attributed much to the recent Seadrill’s block sale. At current levels, the stock is oversold and attractively valued (26% upside to our TP). With its high beta, it offers a good trading proxy to the potential rebound in oil prices. Positive newsflows from its gas fields would be a strong catalyst.
Source: Maybank Research - 5 May 2016
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