Sona, a special purpose acquisition company, is close to securing its qualifying acquisition asset with the Stag oil field. The acquisition is expected to cost it USD25m. Further infill development campaigns are expected to commence post acquisition to increase the 2P reserves as well as the production profile of the oil field. Our DCF valuation at a discount rate of 9.3% implies a suggested MYR0.48 TP.

Sona Petroleum. Sona Petroleum (Sona) is a special purpose acquisition company (SPAC) that was established for the purpose of acquiring exploration and production assets in the oil & gas industry. Sona was listed on 31 Jul 2013 at an IPO price of MYR0.50, having raised a total of MYR550m. For its qualifying acquisition, it is proposing to acquire a 100% interest in Stag oil field, located in Western Australia for a purchase price of USD25m from Quadrant Energy and Santos (STO AU, NR).

Qualifying acquisition. The proposed acquisition includes a production licence which gives Sona the right to explore and produce petroleum as well as a pipeline licence that allows it to construct and operate pipelines. Stag oil field comes with a central processing platform, and 50,000 barrels per day (bpd) capacity and its own pipeline system. The oil field commenced operations in 1998 and is currently producing around 4,000 bpd.

Stag oil field. Sona is planning two infill development post acquisition, which is intended to increase its 2P reserves of the oil field to 17.2m barrels (mbbls) as well as its production profile. We show Stag oil field’s 2P reserves and production profile post the infill developments in Figures 2 & 4.

Capital sweetener. It has proposed that if the vote for acquisition goes through, Sona would pay out 8 sen per share to shareholders, excluding the management team (which holds 20% of Sona through Platinum Autumn). Investment case. The production license for the oil field would be until 2028. We employed a DCF valuation method for the oil field with a 9.3% discount rate and arrive at a suggested TP of MYR0.48. Considering that the acquisition would be a producing asset, the cash flow and earnings impact ought to be immediate once it goes through. For our forecast, we are assuming crude oil price to average at USD37.50/ barrel (bbl) in FY16, USD45/bbl in FY17 and USD60/bbl over the longer period. A higher oil price average than our current assumption would be an upside earnings catalyst for Sona. Risks implicit to our forecast include lower-than-expected average oil price, an unsuccessful infill development campaign, and lower production profile than expected.

Nearing An Acquisition Background Sona is a special purpose acquisition company (SPAC) that was established for the purpose of acquiring exploration and production assets in the oil & gas industry. It was listed on 31 Jul 2013 at an IPO price of MYR0.50, having raised a total of MYR550m. For its qualifying acquisition, it proposed to acquire 100% interest in Stag oil field, located in Western Australia for a purchase price of USD25m from Quadrant Energy and Santos (STO AU, NR). The acquisition On 2 Nov 2015, Sona signed a sales and purchase agreement with Quadrant Energy and Santos, which own 33.3% and 66.67% of Stag oil field respectively. The proposed acquisition includes a production licence which gives it the right to explore and produce petroleum as well as a pipeline licence that allows it to construct and operate pipelines. Stag oil field comes with a central processing platform, and 50,000 barrels per day (bpd) capacity and its own pipeline system. The oil field commenced operations in 1998 and is currently producing around 4,000 bpd.

Reserves Figure 2 below shows the reserves and contingent resources of the Stag oil field. The prospective resource seen below is for the Hart Prospect, which is a potential exploration opportunity that is evaluated to have a 63% geological chance of success. Note that the field reserves figures are post infill development. The first phase is expected to be completed by 2017 and the second phase by 2018.

Infill development To increase Stag’s 2P reserves and production rate, Sona is planning to conduct two infill drilling development plans. The first phase is expected to be completed by 1Q17 while the second phase by 2Q18. The infill development is expected to enhance its 2P reserves and total production by 35%. As at Jun 2015, the Stag oil field was producing oil at 4,600 bpd from 10 wells but its output is declining. With the infill development, production is expected to increase to 4,400 bpd in FY17 and 5,300 bpd in FY18.

Oil field details and forecast We show in Figure 4 the expected production profile from Stag oil field, which includes the additional production from the infill development. The production profile does not include the additional production from the prospective resources.

We also show in Figure 5 some of our assumptions for the Stag oil field, which include our crude oil price forecast, expected production cost of the field and the expected capex to be spent over the life of the field. Note that there would be an abandonment cost of USD95m to be spent in FY28, as the field reaches the end of its economic life.

Risks We outlined several downside risks implicit to our forecast below: i. Lower oil price – Lower realisable oil price than our forecast as shown above; ii. Lower production profile – Production profile of the Stag oil field is lower than our expected profile; iii. Unsuccessful infill drilling – Its infill drilling program is not successful in increasing the oil field production profile; iv. License renewal – Current license expires in 2018 and Sona does not get the approval to extend the license; v. Abandonment cost – Higher abandonment cost than expected, which currently stands at USD94.9m.

Capital sweetener Sona has proposed that if the vote for the acquisition goes through, it would pay out 8 sen per share to shareholders, excluding the management team (which holds 20% of Sona through Platinum Autumn). The source of funds would be paid out from the remaining trust amount, as shown in Figure 1.

Investment case With its proposed 100% acquisition of the Stag oil field, Sona would be an immediately profitable company with sustained cash flow. Upon acquisition, the infill development program is likely to be able to raise the profitability of Sona, as the program would enhance its production profile and proven reserves. We employ DCF as our valuation tool to value the Stag oil field and arrive at a MYR0.48 TP with a discounted rate of 9.3%. We also show in Figure 7 Sona’s valuation to oil price.

SWOT Analysis

Source: RHB Research - 21 Apr 2016