Published May 26, 2009

SPC shares surge to match PetroChina's offer price

By RONNIE LIM

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(SINGAPORE) Singapore Petroleum Company (SPC)'s shares surged 24 per cent to an intra-day high of $6.25 yesterday, matching the price that PetroChina is offering for Keppel Corp's 45.51 per cent stake in the oil company.

SPC, which has refining operations and some exploration and production (E&P) assets, finally closed at $6.05, up 20 per cent. KepCorp shares closed almost 5 per cent higher at $7.28, after hitting a day-high of $7.70.

The brisk market action followed KepCorp's surprise announcement late on Sunday that it has agreed to sell its SPC stake to PetroChina for $1.47 billion - one of the largest public takeovers here.

When the purchase is completed, PetroChina intends to make a mandatory general offer for the rest of SPC, which has a half stake in the Singapore Refining Company (SRC).

PetroChina's move to buy into the local refiner is a break from the pattern of E&P purchases by Chinese companies.

'It is strategically important for PetroChina to boost development in the refining and sales business,' said Wang Jing, chief oil analyst at Orient Securities in Shanghai.

The move underscores PetroChina's commitment to become a key player in the Singapore oil industry. Having already established oil trading and terminal operations here, PetroChina was reportedly looking at building a world-scale refinery in Singapore.

'Most investors look at two things: Is it cheaper to build a new project or buy what's available in the market?' an industry official said.

Sources said that PetroChina sounded out KepCorp as far back as a year ago to buy the latter's SPC stake but the price was not right then. 'The $6.25 price now offered is a good price considering KepCorp originally bought into the company at just slightly over $1,' an observer said.

Circumstances have also changed, with KepCorp realising that SPC does not quite fit its core business. It would also have to pump much more money into SPC's joint venture with Chevron Corp in SRC if it wanted to grow the refining operation.

'SPC, on the other hand, fits in pat with PetroChina's business and you can expect PetroChina to grow its refining base here,' said the observer.

Analysts have backed the sale of SPC by KepCorp.

Given China's aim to be self sufficient in oil, DMG Research believes that Beijing will give the green light to the PetroChina deal. DMG is therefore urging investors to accept the offer. In its report 'Good deal for Keppel', it said that the $6.25 a share price is a 'pleasant upside given the poor refining outlook'.

It cited push factors such as a supply overhang from new overseas refining capacity, as well as the falling value of SPC's E&P assets resulting from poor economics at current crude prices of below US$60. SPC's E&P assets in Bohai Bay, north-eastern China, for instance, were bought when crude averaged US$70, DMG noted.

The sale of SPC - whose earnings are sensitive to crude prices and refining margins - will also help reduce volatility in KepCorp's earnings, DMG said. Additionally, it will bolster KepCorp's war chest, which will help it cover an undertaking to Keppel Land to subscribe in full to its entitlement of rights shares, costing about $373 million.

DMG has called a 'buy' on KepCorp and raised its target price to $8.60 a share from $6.96, although should the deal fall through, the target price will be lower at $7.95.

CIMB agrees that KepCorp's divestment of SPC is attractively priced and 'works out to 17 times FY09 consensus earnings and 14 times SPC's FY08's earnings'.

The sale will also put KepCorp in a net cash position of about $1 billion after KepLand's rights issue, it added. CIMB said that it believes that the excess cash will be used to position the group for more infrastructure projects and to support KepLand. It also expects the group to distribute 40-50 per cent of the net gain of $660 million from the sale, translating to 20 cents per KepCorp share.

Maintaining an 'under-perform' call, CIMB raised its target price for KepCorp to $7.20, from $6.30.

Agreeing that the deal is good for KepCorp, DBS Vickers said that KepCorp will reap cash for the group and that a special dividend is possible.

It noted that KepCorp customer Rowan is seeking to renegotiate payments for four jack-up rig orders and may cancel one of these orders. 'Assuming the remaining payments for all four rigs to be payable upon delivery, we estimate KepCorp needs to self-finance US$430 million to US$550 million of the construction costs,' DBS Vickers said.

It is maintaining its 'fully valued' call on KepCorp, with fair value adjusted to $5.13, from $4.41 previously.