Investment Highlights

• We maintain our BUY recommendation on Sapura Energy (Sapura) with unchanged forecasts and fair value of RM1.00/share, based on a 50% discount to FY19F book value.

• Sapura’s maiden exploration foray into New Zealand through a series of farm-in agreements with OMV New Zealand Limited and Mitsui E&P Australia Pty Limited for 5 offshore exploration permits within the Taranaki Basin could catalyse excitement to the group’s proposed plans to list its exploration and production (E&P) operation, which registered a 9MFY18 pre-tax profit of RM57mil.

• The offshore exploration permits comprise PEP 57075, PEP 51906, PEP 60091, PEP 60092 and PEP 60093. These permits provide access to over 8,900 sq km located in shallow waters where volumes of over 2.5 billion barrels of oil equivalent have been discovered.

• Sapura E&P has a 30% interest in all five exploration permits, which will be operated by OMV New Zealand Limited. The participating interests of PEP 57075 and PEP 51906 are held by Sapura E&P (30%) and OMV (70%) whilst participating interests of PEP 60091, PEP 60092 and PEP 60093 are held by Sapura E&P (30%), OMV (40%) and Mitsui E&P Australia Pty Limited (30%).

• The main operator, Vienna-based OMV, is one of the country’s largest liquid hydrocarbon producers, the third largest gas producer, and a major explorer in a number of offshore basins around New Zealand, particularly the Taranaki Basin. Active in New Zealand since 1999, OMV has interests in 9 blocks, operating 7 while the remaining 2 are Shell-operated licences in the Great South basin.

• 4 permits are located in the Taranaki Basin, which were awarded in December 2015 to OMV and Mitsui on 12-year terms with firm commitments including studies and seismic reprocessing. OMV also owns a deep-water permit in the Taranaki called PEP 51906, awarded in late 2009, and 2 more exploration blocks, PEP 57073 in the Pegasus basin and PEP 57075 in the Taranaki, which were awarded in late 2014.

• Any finds could be up to 2 years away as the operators will need to conduct geological studies first before deciding on an exploratory budget and drilling campaigns. Hence, we do not expect any significant capex increase to Sapura from this development pre-FY2021F.

• Given that New Zealand’s fiscal terms for E&P business is more attractive compared to Malaysia, this development provides longer term visibility to Sapura’s E&P division. The geographical and resource expansion of Sapura’s E&P business is further underscored by its collaboration with Galem Energy in the final list of 36 bidders in Round 3.1 of Mexico’s licensing process.

• More EPCIC jobs are expected, possibly from a central processing platform for the KG-DWN-98/2 deep-water project off India's east coast and 3 more wellhead platforms for Sapura’s own SK408 project. Hence, while we expect operating losses and additional asset impairments in the upcoming 4QFY18 results, we believe that the 73% discount to book value currently is unjustified vs. 0.9x for Bumi Armada and 0.5x for MMHE.

Source: AmInvest Research - 27 Mar 2018