· News: KNM has entered into a Memorandum of Agreement with The National Oil Company of Chad in Djamina, the Republic of Chad, to form a JV (60:40 split in KNM’s favor) to develop, operate and maintain the Sedigi Oilfield facilities in Chad. The concession period is for 5 years, commencing from the first date of production. KNM will undertake the EPCC contract with an estimated value of US$220MM (or US$777MM) for a duration of 24 months.
· Impact on KNM: KNM will see earnings contribution from two parts: (1) EPCC contract of US$220MM over 24 months; and post completion (2) maintenance works at the facility over a concession period of five years. The amount of maintenance work and the rates have yet to be determined. However, we believe that the EPCC contract is unlikely to affect FY09 or 1H10 earnings as the JV will need to secure financing for the project first, after formation of the JV, which should take place before the 31 August 2009. As a result, the contract is likely to start to affect revenue only in 2H10-FY11. This is, however, a high-margin project with gross margins likely to be in the 20-25% range. Note that the financing taken by the JV company will probably be off-balance-sheet for KNM. The oilfield has already secured off-takers for the oil.
· Although we view KNM securing the contract as good news, and stay Overweight on the stock, we believe that it is still too early to tell whether oil/oil-related companies will begin to accelerate their capex plans. Moreover, we have already factored in a recovery in earnings in FY11E (+70%). We still prefer the services segment to EPCC contractors in the Malaysian oil & gas space.
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