Wednesday, May 27, 2009

Singapore Petroleum Co - Sell by OCBC (26 May 09)

Keppel divests entire stake. Keppel Corporation has announced that it will sell its entire 45.5% stake in Singapore Petroleum Company (SPC) to PetroChina for S$6.25/share or approximately S$1.47b in cash. This is at a 24% premium to SPC's closing price on Friday, and is 18.4x of consensus FY09F EPS and 17.4x of our FY09F EPS.

Focus on new substantial shareholder. PetroChina said it presently has no intention of introducing major changes to SPC's business, redeploy SPC's fixed assets, or discontinue the employment of workers, save in the ordinary course of business. If the sale is approved by all relevant authorities by the due date (24 Jul 09), PetroChina intends to make a mandatory general offer for the remaining shares of SPC, but intends to keep SPC listed on SGX, according to the pre-conditional offer document.

The deal from PetroChina's viewpoint. PetroChina had earlier obtained the permission of shareholders in May 09 to obtain up to RMB100b (S$21.2b) through debt financing as part of its international expansion programme. The group is likely to use SPC as a platform for its expansion strategy, and we expect to see new deals surface if everything goes smoothly for PetroChina in the current transaction. Singapore's strategic location, infrastructure, oil and refining capabilities, and the existence of oil majors here is an attractive proposition for PetroChina if it wishes to gain a foothold in the region.

The deal from SPC's viewpoint. As one of the largest oil and gas companies in the world, PetroChina, whose parent company is state-owned China National Petroleum Corporation, has a larger resource base and should be in a better position to develop SPC's potential over the longer term, such as increasing the refinery's complexity rating and enlarging its export market. Oil products from the Singapore Refining Company are currently sold in Singapore and exported to Southeast Asia and China. Accept the offer. PetroChina is paying a 24% premium to SPC's closing price on Friday, which is considerable in view of SPC's dim earnings outlook.

SPC's price spiked up as expected but closed at S$6.05. While some investors would likely have exited, we recommend other investors to sell into strength as it approaches the offer price of S$6.25, which is still higher than our revised fair value of S$4.40 (prev S$2.99). This is based on 12x blended FY09/10F earnings for both upstream and downstream businesses with SPC integrating into a large National Oil Company and recent sector re-rating.

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