Giken transformed itself into an Indonesian onshore oil company

New oil company focused on old wells. Giken Sakata (Giken) owns 51% of Cepu Sakti Energy Pte Ltd (CSE), which has signed contracts for five oilfields under Indonesia’s old wells programme. The first two have proven and probable (2P) reserves and best estimate of contingent resources (2C) of 7.6m barrels of oil (mmbo) and 3.8mmbo respectively. We expect the next three fields to be larger.

 Superior economics yield NPV/barrel (bbl) of USD16.60/bbl, low oil price variability. The Old Wells Programme has a much simpler cash waterfall that results in an NPV/bbl of USD16.60/bbl vs USD7-10/bbl under production sharing contracts (PSCs). The oil is sold at a fixed price to Pertamina, ie there is almost no oil price risk.

 Business model is scalable at negligible cost, strong production ramp-up. CSE can secure new acreages at low cost, requiring only the signing of new contracts. Exploration risk is negligible, as the fields have produced before. It can even reach first oil in the year of contract signing, with no data acquisition costs. Drilling costs are also of its peers. From c.900bbls of oil per day (bopd) currently, we expect 6,356bopd/14,336bopd in FY15/FY16F.

 Strong profitability and cashflow. CSE was already profitable in 1Q14, producing c.300bopd. With a strong production profile, we expect earnings and cash flows to surge. Giken is effectively trading at 3x FY15F P/E, with

Giken Sakata acquired a 53.7% stake in Cepu Sakti Energy Pte Ltd

Company Background:
Giken Sakata (S) Limited (Giken) was incorporated in December 1979 (in Singapore) and was listed on the then SESDAQ (now known as Catalist) in February 1993. Giken positions itself as an integrated contract manufacturer that provides precision machining and engineering services for the manufacturing and assembly of finished products and semi-finished components for the electronic industry. Some products produced by Giken include printed circuit boards, precision micro shafts, turned parts, plastic injection molded parts and others. Giken has plants spanning Singapore, Indonesia and China with bulk of the sales going to Europe and Japan. Going forward, the company is looking at entering into more niche OEM jobs with established electronic MNCs and lift its utilization rate which is currently around 70%-75%. Giken recorded revenue of S$90m and S$137m and PAT of S$373k and S$451k for FY12 and FY13 respectively.

Inside Giken’s FY13 annual report, the Chairman Mr. Chin Siew Gim commented about concerns over the uncertain state of the European and American markets while the CEO Mr. Tan Kay Guan expressed the need to achieve higher resource optimization to cope with higher wages. The challenging industry environment prompted the management to seek alternative routes to boost profitability and the call for diversification led to the acquisition of a 53.7% stake in Cepu Sakti Energy Pte Ltd (Cepu).

The purchase consideration amounts to S$48m and will be paid via
1) approximately S$25.2m in cash and
2) the issue and allotment of new shares of the company for the remaining consideration at the issue price of S$0.30 per share.
The cash consideration will be split into two tranches - the first tranche of S$15m was paid recently while the second tranche of S$10.2m will be paid on a later date, after evidence of the renewal of oil production agreement for the Tungkul field is attained.

About Cepu Sakti Energy Pte Ltd: Cepu is headquartered in Singapore in 2002 and owns 95% of PT Cepu Sakti Energy. The latter has the right to operate and produce oil from three oilfields; in the Tungkul field in Blora, Central Java and the Dandangilo-Wonocolo fields (D&W fields) in Bojonegoro, East Java and the Kawengan field, also in Bojonegoro, East Java. The fields have a total of 230 old well sites, of which 14 are recently operational and producing about 670 barrels of crude oil per day in the month of June 2014. Cepu’s strategy is to drill a new well beside the old well and increase the wells’ depth with the aim of improving the flow rate.

According to the report prepared by Senergy Oil & Gas (Singapore) Pte. Ltd. dated 26 May 2014, the former two fields have a combined 2P crude oil reserve of 9.6m barrels and may be worth a best value of about US$195m based on 10% discount rate. The value will grow to US$222m if the existing agreements expire in 2028.