kencana petroleum berhad proposed...

KENCANA PETROLEUM BERHAD PROPOSED ACQUISITION of 18

KENCANA PETROLEUM BERHAD (“KENCANA PETROLEUM” OR “C OMPANY”) PROPOSED ACQUISITION BY KENCANA PETROLEUM OF 100% E QUITY INTEREST IN ALLIED MARINE & EQUIPMENT SDN BHD FOR A PURCHASE CONSIDERA TION OF RM400 MILLION TO BE SATISFIED BY THE ISSUANCE OF 149,253,731 NEW ORD INARY SHARES OF RM0.10 EACH IN KENCANA PETROLEUM (“KENCANA PETROLEUM SHARES”) AT A N ISSUE PRICE OF RM2.68 PER KENCANA PETROLEUM SHARE

This announcement is dated 13 May 2011. 1. INTRODUCTION

On behalf of the Board of Directors of Kencana Petroleum (“Board”) , AmInvestment Bank Berhad (a member of the AmInvestment Bank Group) (“AmInvestment Bank ”) is pleased to announce that Kencana Petroleum has on 13 May 2011, executed a conditional sale and purchase agreement (“SPA”) for the proposed acquisition of 100% equity interest in Allied Marine & Equipment Sdn Bhd (“AME”) (“Sale Shares ”) for the purchase consideration of RM400 million to be satisfied by the issuance of 149,253,731 new ordinary shares of RM0.10 each in Kencana Petroleum (“Kencana Petroleum Shares ”) at an issue price of RM2.68 per Kencana Petroleum Share (“Proposed Acquisition ”). The vendors of AME are Worldclass Inspiration Sdn Bhd (“WCI”) and Allied Asset Holdings Sdn Bhd (“AAH ”) (collectively referred to as “Vendors ”).

2. DETAILS OF THE PROPOSED ACQUISITION

2.1 Background Information on AME

AME was incorporated in Malaysia under the Companies Act, 1965 (“Act ”) on 28 November 1988 as a private limited company under its present name.

The principal activities of AME are the provision of offshore diving and underwater related

services for inspection, repair and maintenance of structures, pipelines and risers and for the construction of underwater facilities for the oil and gas industry. As at 29 April 2011, the authorised share capital of AME is RM25,000,000 comprising 25,000,000 ordinary shares of RM1.00 each in AME (“AME Shares ”), of which RM18,700,000 comprising 18,700,000 AME Shares have been issued as fully paid-up.

AME is 90% held by WCI, whilst, the remaining 10% is held by AAH. The directors of AME as at 29 April 2011 are Datuk Azizan bin Abd Rahman (“Datuk Azizan ”), Abdul Hamid bin Ibrahim, Aloysius Albert Michael, Nor Hidaya binti Abdul Aziz, James Khong Poh Wah (alternate director to Datuk Azizan) and Noordin bin Sulaiman.


AME has the capability to provide a wide range of sub-sea services for the oil and gas industry that includes, amongst others, the following:-

• major inspection, repair and maintenance on platforms and pipelines; • construction, installation of structures and pipelines; • structural repairs for structures and pipelines; • installations, repair and inspection of export/import facilities; • floating storage and offloading (“FSO”) and floating production, storage and

offloading (“FPSO”) subsea inspection and repairs; • deepwater remotely operated vehicles (“ROV” ) services; and • all other underwater services related to the offshore industry employing both ROV and saturation/air divers. The services provided by AME require specialised equipment, training, qualification and certification for the company and its personnel. For the past three (3) years, apart from Malaysia, AME has also undertaken various projects for multinational oil and gas players in Indonesia, Vietnam, China and India. At the end of year 2008, AME had obtained the International Organisation for Standardisation (“ISO ”) 9001 and Occupational Health & Safety Advisory Services (“OHSAS”) 18001, which requires AME to conduct its business in compliance with international standards and other legal requirements. AME also obtained the ISO 14001 - Environmental Management System in January 2011 Please refer to Appendix I for further information on the key assets and the historical financial performance of AME and/or its subsidiaries (“AME Group ”).

2.2 Background Information on the Vendors

2.2.1 WCI

WCI was incorporated in Malaysia under the Companies Act, 1965 (“Act ”) on 18 April 2007 as a private limited company under its present name. The principal activities of WCI are investment holding, and providing consulting and advisory and corporate brokerage services.

As at 29 April 2011, the authorised share capital of WCI is RM50,000,000 comprising 50,000,000 ordinary shares of RM1.00 each in WCI (“WCI Shares ”), of which RM36,029,629 comprising 36,029,629 WCI Shares have been issued as fully paid-up. As at 29 April 2011, WCI is a wholly-owned subsidiary of Georgia Attraction Sdn Bhd (“GA”). The directors of WCI as at 29 April 2011 are Datuk Azizan and James Khong Poh Wah.


2.2.2 AAH

AAH was incorporated in Malaysia under the Companies Act, 1965 (“Act ”) on 31 May 2010 as a private limited company under its present name. The principal activities of AAH are financial development, property investment and investment holding. As at 29 April 2011, the authorised share capital of AAH is RM1,000,000 comprising 1,000,000 ordinary shares of RM1.00 each in AAH (“AAH Shares ”), of which RM680,002 comprising 680,002 AAH Shares have been issued as fully paid-up. As at 29 April 2011, the shareholders of AAH are Aloysius Albert Michael, Nor Hidaya binti Abdul Aziz and Hanizam bin Muhammad Ali with equity interest of 29.1%, 30.0% and 40.9% respectively. The directors of AAH as at 29 April 2011 are Aloysius Albert Michael, Nor Hidaya binti Abdul Aziz and Hanizam bin Muhammad Ali.

2.3 Salient Terms of the SPA

The salient terms of the SPA include, inter-alia, the following:- 2.3.1 Encumbrances

The Sale Shares will be acquired free from all encumbrances with all rights, benefits and entitlements attaching to the Sale Shares including without limitation all rights, dividends and/or other distributions which may be declared, made or paid in respect thereof, where the entitlement date is on or subsequent to the completion date. The completion date of the Proposed Acquisition shall be no later than 30 days after the fulfilment or waiver of the conditions precedent (“Completion Date ”).

2.3.2 Purchase Consideration

The purchase consideration for the Proposed Acquisition is RM400 million to be satisfied by the issuance of 149,253,731 new Kencana Petroleum Shares (“Consideration Shares ”) at an issue price of RM2.68 per Kencana Petroleum Share.


2.3.3 Profit Guarantee

(a) The Vendors guarantee to Kencana Petroleum that the audited consolidated profit after tax of AME (excluding any unrealised foreign exchange gains/losses and any realised gains/losses arising from the change in the functional currency of Allied Support Corporation (“ASC”), a wholly-owned subsidiary of AME (“Adjusted PAT”)) for each of the financial years ending (“FYE”) 30 September 2011 and 30 September 2012 (“Profit Guarantee Period ”) shall not be less than RM40 million (“Profit Guarantee ”).

(b) Pursuant to the Profit Guarantee, the Vendors shall deposit such number of the Consideration Shares equivalent in value to RM40 million based on the issue price of RM2.68 (“Stakeholding Consideration Shares ”) into a pledged securities CDS Account in the proportion as follows:-

Name Value of Consideration Shares

AAH RM4 million

WCI RM36 million

(c) The aggregate value of the Stakeholding Consideration Shares and if

applicable, the Additional Securities (as defined below) (collectively referred to as “Stakeholding Securities ”) shall be reviewed every three (3) months from the Completion Date, and:

(i) in the event that the aggregate value of the Stakeholding Securities falls below RM36 million, the Vendors are obliged to provide Additional Securities in order that the aggregate value of the Stakeholding Securities is no less than RM40 million. The additional securities to make up the shortfall can be in the form of such number of additional Kencana Petroleum Shares, other shares or securities listed and quoted on the Main Market of Bursa Malaysia Securities Berhad (“Bursa Securities ”) or any other form acceptable to Kencana Petroleum (collectively, “Additional Securities ”); or

(ii) in the event that the aggregate value of the Stakeholding Securities is above RM40 million, the Additional Securities can be released to the Vendors provided that the aggregate value of the Stakeholding Securities shall not fall below RM40 million.

(d) In the event there is a shortfall of the Profit Guarantee, the Vendors will

be required to pay the shortfall by way of cash and/or the proceeds from the disposal of the Stakeholding Securities.


(e) In the event there is a shortfall in the Profit Guarantee for the FYE 30 September 2011 and the Stakeholding Securities have been utilised to make up the shortfall resulting in the value of the Stakeholding Securities falling below RM40 million, the Vendors are required to provide Additional Securities in order for the value of the Stakeholding Securities to be no less than RM40 million. Such Stakeholding Securities shall then be retained for the Profit Guarantee for the FYE 30 September 2012.

(f) In the event there is a shortfall in the Profit Guarantee for the FYE 30

September 2012 and the Stakeholding Securities have been utilised to make up the shortfall resulting in the value of the Stakeholding Securities falling below the Cover Amount (as defined in Section 2.3.4 (b)(iii) below) of RM10 million, the Vendors are required to provide Additional Securities so that the value of the Stakeholding Securities to be no less the Cover Amount. These Stakeholding Securities are required to be retained as security for certain specified warranties events as detailed in Section 2.3.4 (b)(i) below.

(g) In the event the Profit Guarantee for both FYE 30 September 2011 and

30 September 2012 are met, the Stakeholding Securities will be released except for such Stakeholding Securities the value of which is no less than the Cover Amount.

The Board is of the view that the Profit Guarantee is reasonable taking into consideration the historical financial performance of AME Group as detailed in Appendix I of this announcement and the future prospects of the AME Group.

2.3.4 Warranties

In addition to the normal warranties, the Proposed Acquisition is also subject to the following specific warranties:- (a) It is warranted that by 20th June 2011 (or such later date as agreed by

the Kencana Petroleum in writing), AME Group will own four (4) vessels as acceptable to Kencana Petroleum in writing, and all of the said vessels are or will be in good working condition and available for use by the AME Group; and

(b) The warranties pertaining to certain specified events and the terms relevant to the said warranties are as detailed below:- (i) The Vendors warrant that should there be any liability to be

incurred or suffered by AME in connection with the Specified Events (as defined below), the Vendors shall pay and compensate Kencana Petroleum (“Warranties Event ”). The specified events relates to events that potentially could cause a liability to be incurred by AME in relation to specific litigation, taxes and billings issues (“Specified Events ”).

(ii) The warranty period for the Specified Events is from the Completion Date up to and including the fifth (5th) anniversary of the Completion Date (“Specified Warranties Period ”).


(iii) As security for the Warranties Event, the Stakeholding Securities amounting to not less than RM10,000,000 (“Cover Amount ”) shall continue to be retained in the pledged securities CDS Account or in such other manner as applicable after the Profit Guarantee Period and up to the end of the Specified Warranties Period.

(iv) In the event AME is to incur any liabilities in connection with the

Warranties Event, the Vendors will be required to compensate Kencana Petroleum by way of cash and/or the proceeds from the disposal of the Stakeholding Securities.

(v) Any balance of the Stakeholding Securities after the Warranties

Event has been satisfied shall continue to be retained until the end of the Specified Warranties Period, and thereafter be released to the Vendors.

(vi) In the event the Warranties Event occurs during the Profit

Guarantee Period, any excess of the Adjusted PAT over the Profit Guarantee of RM40 million can be utilised to reduce the liability arising from the Warranties Event which occurs during that financial year.

(vii) However, in the event the Warranties Event occurs during the

Profit Guarantee Period and causes a corresponding reduction in the Adjusted PAT, the Vendors are not liable to compensate for such Warranties Event as it will be compensated under the Profit Guarantee.

2.3.5 Conditions Precedent

The SPA is conditional upon the following conditions having been fulfilled within three (3) months from the date of the SPA or such other date as mutually agreed by the parties:-

(a) the results of the legal, financial and tax due diligence on AME (which

includes inspection of all vessels owned by AME Group and the Additional Vessel (as defined in 2.3.5(d) below) being reasonably satisfactory to Kencana Petroleum;

(b) there has been no event nor circumstances, since the date of the latest

audited financial statements for the financial year ended (“FYE”) 30 September 2010, which has a material adverse effect (as defined in the SPA) on, amongst others, the assets (including the vessels owned by the AME Group and the Additional Vessel) ability, business, liabilities, operations or condition of the AME Group;

(c) the existing contract entered into with an AME’s top key customer by

revenue for the year 2010 to the date hereof remaining valid and subsisting and the Vendors are not aware of any events or circumstances whereby the said contract is liable to be terminated;


(d) a valid and binding agreement being executed by AME and/or its subsidiaries for the purchase of an additional offshore support vessel as approved by Kencana Petroleum in writing (“Additional Vessel ”) and the agreement has not been terminated for any reason whatsoever;

(e) the approval of the shareholders of Kencana Petroleum for the Proposed

Acquisition; (e) the approval of Bursa Securities for the listing of and quotation for the

Consideration Shares; and (f) all other approvals, consents, authorisations, permits or waivers of any

regulatory agency, authority or parties necessary or appropriate for and in connection with the Proposed Acquisition.

Kencana Petroleum will have the sole discretion to waive the conditions precedent of which are for the sole benefit of Kencana Petroleum, as specified in 2.3.5 (a) to (d) above.

2.4 Basis of Arriving at the Purchase Consideration

The purchase price was arrived at on a “willing buyer willing seller” basis after having taken into consideration the following:-

(a) the historical financial performance and cash flows of AME Group;

(b) the quality of AME Group’s assets and vessels;

(c) the level of indebtedness of AME Group;

(d) the earnings potential and future prospects of AME Group;

(e) the future prospects of the industry in which AME operates;

(f) the Profit Guarantee, which implies an acquisition multiple of 10 times the guaranteed Adjusted PAT for FYE 30 September 2011 and 2012;

(g) the contract with a principal customer of AME;

(h) the strategic rationale for the acquisition and the potential synergies with Kencana Petroleum’s existing businesses; and

(i) the current trading multiples of peers and acquisition multiples observed in the offshore services sector.

2.5 Basis of determining the Issue Price of the Con sideration Shares

The proposed issue price of RM2.68 per Kencana Petroleum Share to be issued pursuant to the Proposed Acquisition is based on the five (5) days volume weighted average market price up to 10 May 2011, being the latest practicable date prior to the finalisation of the terms of the SPA.


2.6 Ranking of the Consideration Shares to be issue d pursuant to the Proposed Acquisition The Consideration Shares shall be issued free from all encumbrances and shall rank pari passu in all respects with the existing issued and fully paid-up ordinary shares of Kencana Petroleum. In addition, the Consideration Shares are issued with all rights, benefits and entitlements attaching to the Consideration Shares including without limitation all rights, dividends and/or other distributions which may be declared, made or paid in respect thereof, where the entitlement date is on or subsequent to the Completion Date.

2.7 Listing Status of the Consideration Shares to b e issued pursuant to the Proposed Acquisition Kencana Petroleum will make an application to Bursa securities for the listing of the Consideration Shares on the Main Market of Bursa Securities.

2.8 Liabilities to be Assumed by Kencana Petroleum

Except for the Corporate Guarantees as detailed below which may be assumed by Kencana Petroleum, there are no liabilities, including contingent liabilities and guarantees, to be assumed by Kencana Petroleum pursuant to the Proposed Acquisition.

The corporate guarantees are given by the Vendors as security for the facilities granted

by a financial institution to AME Group. As at 31 March 2011, these facilities amounted to approximately RM189 million (“Corporate Guarantees ”).

2.9 Estimated Additional Financial Commitment

AME is an established company. Kencana Petroleum does not expect to extend any financial commitment to AME in the near future in order to put the business of AME on-stream pursuant to the Proposed Acquisition.


3. RATIONALE FOR THE PROPOSED ACQUISITION

The Proposed Acquisition is a critical step in enabling Kencana Petroleum Group to achieve its objective of becoming a fully integrated offshore services player and establish a strong footprint for Kencana Petroleum Group in the subsea services and deep water segment. Through the Proposed Acquisition, Kencana Petroleum Group would gain exposure to a rapidly growing offshore subsea business in Malaysia and South East Asia. The Proposed Acquisition would provide an opportunity to leverage on AME’s customers and to cross-sell services across clients of both group of companies i.e. Kencana Petroleum Group and AME Group. The Proposed Acquisition will also enable Kencana Petroleum Group to recognise in full the earnings stream and cash flows that is expected to be generated by AME. The Proposed Acquisition is expected to expand Kencana Petroleum’s recurring revenues with higher margins being earned. There are also potential cost synergies for Kencana Petroleum Group with the possibility of AME Group providing services to Kencana Petroleum Group’s in-house subsea services requirements apart from savings on general and administration overheads. The Proposed Acquisition is also expected to be earnings accretive for Kencana Petroleum’s shareholders

4. PROSPECTS OF THE PROPOSED ACQUISITION 4.1 Overview of the Malaysian Economy

The Malaysian economy registered a growth of 4.8% in the 4th quarter of 2010 (“4Q 2010”). Higher private and public sector spending contributed to the expansion in domestic demand. The slower growth in the global economy, however, had led to weaker growth in external demand. On the supply side, all economic factors, with the exception of the primary sectors, continued to expand further during the quarter. For the year 2010 as a whole, the Malaysian economy registered a growth of 7.2% (2009: -1.7%).

Domestic demand strengthened by 5.7% in the 4th quarter (3rd quarter of 2010 (“3Q 2010”): 10.5%), due mostly to the strong expansion in private consumption and capital spending. Private consumption increased by 6.5% (3Q 2010: 7.1 %) supported by favourable labour market conditions, positive consumer confidence and higher income levels. Public consumption, on the other hand, declined by 0.3% (3Q 2010: -10.2%), arising from lower expenditure on supplies and services. Gross fixed capital formation increased by 9.2% (3Q 2010: 9.8%) driven by both public and private capital spending. Private sector capital spending was led by the expansion in production of domestic-oriented industries amid high levels of capacity utilisation. Public sector capital investment rose as a result of higher development expenditure mainly in the education and transportation sectors.


On the supply side, all economic sectors, with the exception of the primary sectors, continued to expand further in the 4th quarter. Growth in the services sector was higher at 6.2% (3Q 2010: 5.4%) with expansion in all sub-sectors, supported mainly by domestic economic activity. The construction sector also registered higher growth of 5.6% (3Q 2010: 2.8%), reflecting expansion in the non-residential and civil engineering sub-sectors. The manufacturing sector expanded at a more moderate pace of 6.2% (3Q 2010: 7.5%) mostly on account of the weaker external demand. The agriculture sector, however, registered a contraction of 4.3% (3Q 2010: 2.7%) attributed to the decrease in palm oil output. The mining sector contracted further by 1.3% (3Q 2010: -1%) due to continued declined in production of crude oil.

The headline inflation rate, as measured by the change in the Consumer Price Index, increased by 2% on an annual basis in the 4th quarter (3Q 2010: 1.9%). The increase in inflation was attributable mainly to higher price of food and non-alcoholic beverages which rose by 2.9% and transport which rose by 2.5% (3Q 2010: 2.1%) reflecting the further removal of fuel subsidies by the Government which resulted in an upward adjustment of 5 sen/litre for RON95 petrol and diesel prices.

In the external sector, the trade surplus widened to RM25.5 billion in the 4th quarter (3Q 2010: RM22.3 billion). Both gross exports and imports increased at a more moderate pace of 3.7% and 10.1% respectively (3Q 2010: 10.4% and 16.5% respectively), in line with the moderation of the global economy. The slower growth in exports was due mainly to the lower exports of manufactured products, reflecting the softening global demand for electronics. The moderation in gross imports reflected mainly lower intermediate imports while imports of capital and consumption goods were sustained amidst strengthening domestic demand.

(Source: Economic and Financial Developments In Malaysia In the Fourth Quarter of 2010, Bank Negara Malaysia)

4.2 Prospects of the of the Industry in which AME O perates in

As at end-December 2009, there were 68 oil producing fields in Malaysia and crude oil reserves stood at 5.80 billion barrels. The reserves are expected to last 24 years (1 January 2009: 5.52 billion barrels; 22 years) based on current production levels. Petronas is continuing its exploration activities to build up national reserves and spur local oil and gas-related industries. As a result, Petronas discovered the Anjung Kecil oil field in offshore Sarawak in 2010.

In the first half of 2010, higher production of natural gas in the country offset the lower production of crude oil. Crude oil production contracted 3.8% as a result of unplanned shutdowns on oil facilities, as well as compliance with production limits set under the National Depletion Policy and Petronas’ Reservoir Management Plan programme.

(Source: Economic Report 2010 / 2011)


In 2009, Malaysia’s combined oil, gas and energy sectors represented 19% of the country’s total GDP. Through the Economic Transformation Programme (ETP) introduced in 2010, the Malaysian Government is focused on sustaining upstream production, enhancing downstream growth, making the country the number one Asian hub for oilfield services and building a sustainable energy platform for growth. Through Enhanced Oil Recovery (EOR) processes, the development of marginal fields and intensifying exploration activities, the country is targeting an additional 221 mb/d of oil production. The country is also targeting to gain 15% of the shallow water and 50% of the deepwater market in Asia Pacific by 2020. These initiatives alone are expected to require total investment of RM10.7 billion. (Source: Economic Transformation Programme, 2010) The Board is of the opinion that an increase in offshore activity will result in increased demand for services of AME in Malaysia. World economic growth is expected to grow by 3.9% in 2011, slightly down from previous forecasts due to the impact of the events in Japan, which is now forecasted to decline by 0.1%, compared to growth of 1.5% forecasted previously. The recovery in the rest of the world is expected to continue. World oil demand is forecast to grow by 1.4 mb/d in 2011, following an increase of 2.0 mb/d in the previous year. Japan’s disaster led to a sudden decline in the country’s use of oil. However, this is expected to be offset by fuel substitution from nuclear to crude-burning and rebuilding operations later in the year. In 2011, demand from Organization of the Petroleum Exporting Countries (“OPEC”) crude is expected to average 29.9 mb/d, about 0.4 mb/d higher than a year ago and 0.1 mb/d over the previous assessment. Non-OPEC oil supply is expected to increase by 0.6 mb/d in 2011, an upward revision of 0.1 mb/d from the previous month. The adjustment was supported mainly by healthy production during the first few months of the year. Anticipated growth continues to be driven by Brazil, US, Canada, Colombia and China. According to preliminary data, total OPEC crude production in March averaged 29.31 mb/d, a decline of 0.6 mb/d from the previous month.

(Source: Monthly Oil Market Report, Organization of the Petroleum Exporting Countries, April 2011)

Global oil output fell 0.7 mb/d to 88.3 mb/d in March 2011 on reduced Libyan crude supply. Non-OPEC production rose 0.2 mb/d to 53.3 mb/d, even as unrest and strikes in Yemen, Oman, Gabon and Ivory Coast shuts in an average 0.1 mb/d of crude in March and April. Non-OPEC 2010 supply is left at 52.8 mb/d. OPEC crude supply fell by 0.9 mb/d in March 2011 to 29.2 mb/d, on a near-70% drop in Libyan output. Effective OPEC spare capacity stood at 3.91 mb/d, with Saudi Arabia accounting for 3.2 mb/d. Global product demand remained at 87.9 mb/d (+2.9 mb/d year-on-year) and 89.4 mb/d (+1.4 mb/d) for 2010 and 2011 respectively. Higher anticipated post-earthquake Japanese oil use for power generation and reconstruction offsets downward non-OECD adjustments. (Source: Highlights of the latest Oil Market Report 12 April 2011, International Energy Agency)


Offshore oil & gas capex in the Asian region is expected to increase to US$79.4bn between 2010 and 2014, up from US$56.1bn from 2005 to 2009. Malaysia and Indonesia are expected to be the leading capex contributors, with total capex of US$17.3bn. In addition, Malaysia is expected to make significant forays into deepwater oil and gas development while Indonesia is also seeking to develop its offshore gas reserves.

Capex on pipeline and fixed platforms will dominate regional offshore oil and gas capex. Together, they will account for approximately 79% of total Asia offshore capex between 2010 and 2014. The strong presence of fixed platforms reflects the dominance of shallow water developments, but it is also expected that deepwater developments in the region will start gaining momentum.

(Source: Offshore Asia Pacific Oil & Gas Market Update Report To 2014, Infield)

In addition, the Board is of the opinion that the dynamics of the oil and gas industry shall remain favourable, with supply continuing to be tight amidst strengthening demand. Led by Malaysia and Indonesia, Asia Pacific offshore capital expenditure is expected to continue growing at a fast rate, as companies continue to place emphasis on offshore exploration and production.

In view of the above, the Board is of the view that the prospects of AME in light of the prospects of the oil and gas industry and therefore the offshore services business prospects would be positive.

4.3 Prospects of AME

AME’s prospects are highly linked to the dynamics in the oil and gas industry in South East Asia and primarily in Malaysia. With the prospects for the oil and gas industry appearing positive (as indicated in Section 4.2 above) with increases expected in capital expenditure of oil and gas companies, AME is expected to benefit positively from the greater demand for subsea services resulting from an increased activity in the oil and gas sector in the region. Furthermore, AME is expected to continue to see demand for subsea services from oil and gas companies who would want to maintain their current facilities and pipelines. Based on the above, the Board is of the view that the prospects of AME going forward would be positive.


5. RISK FACTORS IN RELATION TO THE PROPOSED ACQUIS ITION

The Proposed Acquisition is not expected to materially change the risk profile of the Kencana Petroleum Group’s business as AME is in a similar industry to that which Kencana Petroleum Group currently operates. The Kencana Petroleum Group will continue to be exposed to similar business, operational, financial and investment risks inherent in the oil and gas industry, although exposure may be larger for Kencana Petroleum Group as it will now be exposed to the subsea service segment.

These risks include, but are not limited to AME’s dependence on a principal customer, completion risk of the Proposed Acquisition, increase in gearing of the Kencana Petroleum Group, stiff competition from other players as well as failure to attract and retain the skilled personnel of AME Group.

6. FINANCIAL EFFECTS OF THE PROPOSED ACQUISITION The financial effects of the Proposed Acquisition are as follows:-

6.1 Share Capital and Substantial Shareholders’ Sha reholdings

The effects on the share capital of Kencana Petroleum are as follows:-

No. of Kencana Petroleum Shares

(’000) (RM’000) As at 29 April 2011 1,837,484 183,748 New Kencana Petroleum Shares to be issued pursuant to the Proposed Acquisition

149,254 14,925

After the Proposed Acquisition 1,986,738 198,673


6.2 Substantial Shareholders’ Shareholdings The effects on the substantial shareholders’ shareholdings are as follows:-

Existing @ 29 April 2011 After Proposed Acquisition Name of Shareholder

Direct Indirect Direct Indirect

Number (‘000) %

Number (‘000) %

Number (‘000) %

Number (‘000) %

Khasera Baru Sdn Bhd 632,696 34.4 - - 632,696

31.9 - -

Dato' Mokhzani bin Mahathir 7,553 0.4 632,696 34.4(a) 7,553

0.4 632,696 31.9(a)

Chong Hin Loon 95,477 5.2 - - 95,477

4.8 - - Kumpulan Wang

Persaraan (Diperbadankan) 116,033 6.3 - - 116,033

5.8 - - Employee

Provident Fund Board 113,876 6.2 - - 113,876

5.7 - -

WCI - - - - 134,328 6.8 - -

AAH - - - - 14,925 0.8(d) - -

GA - - - - - - 134,328 6.8(b)

Datuk Azizan - - - - - - 134,328 6.8(c)

Notes:- (a) Deemed interested by virtue of his interest in Khasera Baru Sdn Bhd pursuant to Section

6A of the Act; (b) Deemed interested by virtue of its interest in WCI pursuant to Section 6A of the Act; (c) Deemed interested by virtue of his interest in WCI and GA pursuant to Section 6A of the

Act; and (d) AAH will not be a substantial shareholder after the Proposed Acquisition in view of its

interest in Kencana Petroleum is less than 5%. However, this has been incorporated to illustrate the impact of the Proposed Acquisition.


6.3 Net Assets (“NA”) and Gearing

Based on the audited consolidated NA of Kencana Petroleum as at 31 July 2010 and assuming that the Proposed Acquisition is completed as at the same date, the proforma effects of the Proposed Acquisition on the NA of Kencana Petroleum Group are as follows:-

(I) (II) (III)

Audited as at 31 July

2010

After (I) and the Subsequent

Events (a)

After (II) and after

Proposed Acquisition (c)

(RM’000) (RM’000) (RM’000)

Share Capital 165,797 183,748 198,674

Share Premium 197,544 587,541 972,615

Other Reserves 2,561 585 585 Retained Profits 387,588 396,181 388,981(d) Shareholders’ funds / NA 753,490 1,168,055 1,560,855

No. of Kencana Petroleum Shares in issue (’000)

1,657,969 1,837,484 1,986,738

NA per Kencana Petroleum Share (RM) 0.45 0.64 0.79 Total borrowings 225,876 514,176 (b) 713,991 Gearing (times) 0.30 0.44 0.46 Notes:-

(a) Subsequent events include the acquisition of Kencana Marine Rig 1 Pte. Ltd. (formerly

known as Mermaid Kencana Rig 1 Pte. Ltd.) (“KMR1”), Kencana Marine Drilling Sdn. Bhd. (formerly known as Kencana Mermaid Drilling Sdn. Bhd.) (“KMD”) and Kencana Marine Rig 1 (Labuan) Pte. Ltd. (formerly known as Mermaid Kencana Rigs (Labuan) Pte. Ltd. (“KMR Labuan”) which were completed on 5 August 2010, the private placement of 166,698,000 new Kencana Petroleum Shares which was completed on 7 February 2011 (“Private Placement”) and exercise of the Kencana Petroleum’s employee share option scheme (“ESOS”) options from 1 August 2010 until 29 April 2011 (“Subsequent Events”).

The financial results for KMR1 is based on the unaudited financial statements for the FYE 31 July 2010;

(b) After taking into consideration the following:-

(i) borrowings incurred by Kencana Petroleum Group pertaining to, amongst others, the acquisition of KMR1, KMD and KMR Labuan and to refinance the construction costs of the tender assisted drilling rig owned by KMR Labuan; and

(ii) assuming that RM83.7 million of the proceeds from the Private Placement will be utilised to repay the borrowings of Kencana Petroleum Group;

(c) The financial results of AME is based on the audited financial statements for the FYE 30

September 2010; and

(d) After incorporating the estimated expenses for the Proposed Acquisition.


6.4 Earnings and Earnings Per Kencana Petroleum Sha re (“EPS”)

The Proposed Acquisition is not expected to have a material effect on the earnings and EPS of the Kencana Petroleum Group for the financial year ending 31 July 2011 as the Proposed Acquisition is only expected to be completed in the third (3rd) quarter of 2011. Barring unforeseen circumstance, the Proposed Acquisition is expected to be earnings accretive to the Kencana Petroleum Group. Assuming that the Proposed Acquisition is completed at the start of the FYE 31 July 2010, the proforma effects on the earnings and EPS are as follows:-

Audited

FYE 31 July 2010

RM’000

Subsequent Events (a)

RM’000

After the Proposed Acquisition

RM’000 Profit After Tax and Minority Interest (“PATMI”) of Kencana Petroleum Group attributable to the owners of the Company 136,166 136,166 136,166 136,166 AME’s PAT based on:- - Audited PAT for the FYE

30/9/2010 - - 23,205 -

- Profit Guarantee - - - 40,000 Proforma PATMI 136,166 136,166 159,371 176,166 Number of Issued and Paid-Up Shares 1,657,969 1,837,484 1,986,738 1,986,738 EPS (sen) 8.21 7.41 8.02 8.87

Note:- (a) The effects of the acquisition of KMR1, KMD and KMR Labuan, the Private Placement

and the exercise of the Kencana Petroleum’s ESOS options from 1 August 2010 until 29 April 2011 have not been included in the above.

7. APPROVALS REQUIRED

The Proposed Acquisition is conditional upon the approvals being obtained from the following:-

(i) shareholders of Kencana Petroleum at an extraordinary general meeting (“EGM”) to be

convened for the Proposed Acquisition;

(ii) Bursa Securities for the listing of the Consideration Shares to be issued pursuant to the Proposed Acquisition; and

(iii) any other relevant authority (if required).

The Proposed Acquisition is not conditional upon any other proposals.


8. CORPORATE EXERCISE ANNOUNCED BUT PENDING COMPLET ION

Save for the proposed acquisition of the 100% equity interest in Dhow Offshore Sdn Bhd by Kencana Nautilus Sdn Bhd as announced on Bursa Securities on 24 January 2011 and the fundraising proposals (excluding the Private Placement) which was announced on 3 December 2010 and 9 December 2010, Kencana Petroleum Group does not have any other corporate exercise which has been announced on Bursa Securities but not yet completed prior to this announcement.

9. DIRECTORS’ AND MAJOR SHAREHOLDERS’ INTERESTS

None of the Directors and/or major shareholders of Kencana Petroleum and persons connected to them are interested in the Proposed Acquisition as the Directors and/or major shareholders and persons connected to them do not have direct or indirect interest in AME and/or the Vendors which exceeds 5% of its respective issued and paid-up share capital. Nevertheless, Mr Yeow Kheng Chew has voluntarily abstained and will continue to voluntarily abstain from all Board deliberations and voting at the Board meetings in relation to the Proposed Acquisition by virtue of him being a director of Kencana Petroleum and by virtue of him having entered into an arrangement on 28 March 2011 to acquire approximately 3.3% in GA for a purchase consideration to be determined at the completion date based on the adjusted net assets of GA adjusting for, inter-alia, the projected value of AME of RM400 million. This acquisition is to facilitate Kencana Petroleum’s negotiation on the Proposed Acquisition with the Vendors. Mr Yeow Kheng Chew will also voluntarily abstain from voting in respect of his direct and/or indirect shareholdings in Kencana Petroleum on the resolutions pertaining to the Proposed Acquisition at the forthcoming EGM.

10. DIRECTORS’ STATEMENT

The Board after having considered all aspects of the Proposed Acquisition is of the opinion that the Proposed Acquisition is in the best interest of the Kencana Petroleum Group. Accordingly, the Board (save for Mr Yeow Kheng Chew) recommends that you vote in favour of the ordinary resolution pertaining to the Proposed Acquisition to be tabled at the forthcoming EGM.

11. ADVISERS

AmInvestment Bank and UBS Securities Malaysia Sdn Berhad have been appointed as advisers to Kencana Petroleum for the Proposed Acquisition.

12. ESTIMATED TIMEFRAME FOR THE COMPLETION OF THE PROPOSED ACQUISITION

The Proposed Acquisition is expected to be completed in the third (3rd) quarter of 2011.


13. CIRCULAR TO SHAREHOLDERS A circular to shareholders setting out the details of the Proposed Acquisition will be despatched to shareholders of Kencana Petroleum in due course.

14. OTHER INFORMATION

The highest percentage ratio applicable to the Proposed Acquisition as per Paragraph 10.02(g) Chapter 10 of the Listing Requirements is the consideration compared with the audited consolidated net assets of Kencana Petroleum as at 31 July 2010 which amounts to approximately 53%.

15. DEPARTURE FROM THE EQUITY GUIDELINES OF SECURIT IES COMMISSION (“SC”) (“SC

GUIDELINES”) To the best of the knowledge of the Board, the Proposed Acquisition does not depart from the SC Guidelines. The Proposed Acquisition does not require the approval of the SC.

16. DOCUMENTS FOR INSPECTION

The SPA will be made available for inspection at the Registered Office of Kencana Petroleum at Lot 6.08, 6th Floor, Plaza First Nationwide, No. 161, Jalan Tun H.S. Lee, 50000 Kuala Lumpur Malaysia from Mondays to Fridays (except public holidays) from the date of this announcement to the date of the extraordinary general meeting of Kencana Petroleum in relation to the Proposed Acquisition.

APPENDIX I 1. HISTORICAL FINANCIAL INFORMATION

The table below sets out a summary of AME’s audited financial statements from the nine (9) months financial period ended (“FPE”) 30 September 2008 to the financial year ended (“FYE”) 30 September 2010:-

Audited 9 months FPE

30/9/2008 (Restated) FYE 30/9/2009 FYE 30/9/2010

RM’000 RM’000 RM’000 Revenue 73,401 57,976 202,775 Profit Before Tax (“PBT”) 17,189 1,013 19,653 Taxation (2,004) (177) 3,552 Profit After Tax (“PAT”) 15,185 836 23,205 Unrealised Foreign Exchange Loss/ (gain) (882) (180) 14,570 Adjusted PAT 14,303 656 37,775 EBITDA - EBITDA 21,066 11,659 41,099 - Based on adjusted EBITDA i.e excluding foreign

gain/loss 20,184 11,479 55,669 Gross EPS (RM)(a) - Based on PBT 1.97 0.12 2.26 - Based on adjusted PBT i.e excluding foreign gain/loss 1.87 0.10 3.93

Net EPS (RM) - Based on PAT 1.75 0.10 2.67 - Based on adjusted PAT i.e. excluding forex gain/loss 1.64 0.08 4.34 Paid-up capital 8,700 8,700 8,700 Shareholders’ Funds/ Net Assets 63,366 64,071 86,732 Net Assets/ AME Share (RM) 7.28 7.36 9.97 Current Ratio (times) 0.28 0.64 0.86 Total Borrowings 2,188 128,383 199,815 Gearing (times) 0.03 2.00 2.30 Note:- (a) Computed as PBT divided by the Number of AME Shares in issue.

Commentaries on financial performance

Nine (9)-Months FPE 30 September 2008 AME Group has recorded revenue of RM73 million and PAT of RM15.2 million for the FPE 30 September 2008. This was a decline of 36.5% and 2.6% respectively over the revenue of RM115 million and PAT of RM15.6 million previously recorded. The reduction in revenue and PAT was primarily due to the shorter financial year as a result of the financial year end of AME has been changed from 31 December to 30 September during the year.

FYE 30 September 2009 AME Group has recorded a revenue of RM58 million and PAT of RM0.8 million for the FYE 30 September 2009. The reduction in revenue and PAT for the financial year as compared to the nine (9) months FPE 30 September 2008 was primarily due to reduced work orders from the effect of the global economic downturn. In addition, one of the vessels (i.e. Allied Centurion) has to undergo major repair works which resulted in the increase of repair expenses. The reduction in PAT was further compounded by the higher depreciation charge and finance cost as a result of the acquisition of Allied Conquest during the year. FYE 30 September 2010 AME Group has turned in a record revenue and PAT of RM203 million and RM23.2 million respectively. This is a substantial increase compared with the revenue and PAT recorded in the previous year. The increase was primarily due to the recognition of the full year revenue contribution from the contract of AME’s principal customer. Nevertheless, the increase in the PAT for the year was reduced by the recognition of unrealised loss of RM14.6 million arising from the translation of the, amongst others, USD denominated intercompany loans to RM due to the strengthening of the RM. Excluding the unrealised loss, the adjusted PAT of AME would be RM37.8 million.

2. KEY ASSETS OF AME

The key assets of AME are the vessels with key features as follows:-

Vessel Name Allied Centurion Allied Conquests Allied Achiever

Year Built Original – 1966

(rebuilt 1999)

2006 2000

Age 12 years 5 years 10 years

Delivery Date 1999 2008 2010

Gross Tonnage 2,455 tonnes 2,739 tonnes 1,383 tonnes

Size (m) 80 x 13 x 6 75 x 15 x 5 60 x 13 x 4

Crew Size 59 62 60

Endurance 30 days 50 days 50 days

AME had on 10 May 2011, entered into a memorandum of agreement to acquire an additional vessel.

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