Investment Highlights

• We upgrade our recommendation on Sapura Energy (Sapura) to BUY from HOLD given the attractive upside potential to our unchanged fair value of RM1.00, based on a 50% discount to FY19F book value.

• Sapura has confirmed media reports that it has engaged advisors to evaluate and advise on the potential listing of the group’s exploration and production (E&P) business.

• We are neutral on this development pending further listing details such as the stock exchange selection amid a potentially volatile crude oil price environment if the present trajectory were to be reversed. In our view, the current price surge is partly driven by the unusually cold winter season in the northern hemisphere, supply declines in Venezuela and speculative futures positions.

• Sapura’s RM1.7bil borrowings (10% of the group’s RM17bil total debt) are categorized under current liability as at 31 October 2017, but comprise revolving credits which do not have to be settled. Hence, the group does not have any huge debt repayment scheduled for this year.

• Cushioned by the longer dated debt schedule with the group exploring options to extract value from its core operations and reduce the huge debt load, we do not expect management to adopt value-destructive corporate exercises for shareholders at this juncture, notwithstanding our projections of Sapura’s losses of RM563mil in FY18F and RM392mil in FY19F.

• Recall that Sapura acquired the Malaysia-based production assets of Newfield International for US$896mil in February 2014, which secured net reserves of 243mil barrels of oil equivalents and quarterly production of 0.8-0.9mil barrels (see Exhibit 3-4).

• In 3QFY18, even though the E&P division’s revenue rose 28% QoQ from the US$8/barrel increase in average crude price to US$58/barrel and a 12% increase in production to 0.9mil barrels, the segment’s pre-tax profit plunged 61% QoQ to RM9mil from the absence of one-off cost write-backs in 2QFY18.

• The commencement of 100mil cu ft/day gas production from the group’s 30%-owned SK310 B15 development began in November last year. Assuming the current oil price of US$68/barrel and depreciation charge over the field life of only 5½ years on the capex of US$300mil, we estimate that this new field can contribute RM30mil annually, 8% of the group’s FY19F loss.

• Even though the pace of offshore projects remains tepid globally, the group’s order book of RM15.1bil translate to 2.2x FY19F revenue with management hopeful of further wins from tender prospects worth up to US$9.5bil. The stock currently trades at an attractive 0.4x FY18F book value vs. 0.9x for Bumi Armada and 0.5x for MMHE.

Source: AmInvest Research - 26 Jan 2018