Investment Highlights

• We maintain our BUY recommendation on Sapura Energy (Sapura) with an unchanged fair value of RM1.00/share based on a lower 40% discount (from an earlier 50%) to our revised FY19F book value with the inclusion of the RM2.1bil impairments of rigs and vessels in 4QFY18.

• Sapura’s FY18 normalised loss of RM243mil (excluding impairments and unrealised forex loss) was within our expectations, but worse than consensus. However, we have cut FY19F loss by 70% and reversed our FY18F loss to a net profit of RM118mil from: (1) a 12%-13% reduction in our depreciation assumptions due to the substantive asset impairments; and (2) US$5/barrel increase in crude oil prices for FY19F-FY20F and 5% increase in production for FY19F and flat for FY20F with the commencement of SK310 B15 field late last year.

• We also introduce FY21F earnings surge of 2.9x, driven by higher asset utilisation rate assumptions for both engineering & construction (E&C) and drilling while the production levels of the exploration and development (E&P) division will more than double from the commencement of the Larak and Bakong fields in SK408.

• In 4QFY18, the E&P loss accelerated by 2.9x QoQ to RM84mil due to the seasonal trough amid low fabrication orders while the normalised results of the drilling segment surprised by just breaking even due to lower depreciation charges arising from the impairments.

• Sapura’s rig utilisation remained at only 5 rigs in 4QFY18 as the commencement of SKD Alliance’s charter with Shell will only start in April 2018 on a 5-year firm contract with another 5 annual extensions. However, another rig will drop out of charter in August this year, which could mean a reversion to 5 rigs again unless the group secures additional contracts.

• QoQ, the E&P operations soared 3.1x to RM26mil in 4QFY18 from the 38% increase in production to 1.1mil barrels of oil equivalent while average crude oil prices rose 19% to US$69/barrel. The commencement of 100mil cu ft/day gas production from the group’s 30%-owned SK310 B15 development late last year will significantly contribute to the group given that the capex was 45% below budget amid higher crude oil prices.

• Besides the RM2.7bil contracts secured so far this year which raised order book by 10% QoQ to RM16.6bil, 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. This is underpinned by the 37% QoQ increase in the group’s prospective tenders to US$13bil from new markets in the Middle East, Latin America, India and Africa.

• Sapura, which has a 30% stake in a consortium with DEA (40%) and Premier Oil (30%), just secured Block 30 in the Sureste Basin and Blocks 11 and 13 in the Burgos Basin, Gulf of Mexico in Mexico’s Round 3.1 bidding exercise. Together with the recent farm-in agreements to 5 offshore exploration permits in Taranaki Basin, New Zealand, the proposed listing of Sapura’s E&P operations will reignite its re-rating process given an unjustified PBV of 0.3x currently vs. 0.9x for Bumi Armada.

Source: AmInvest Research - 29 Mar 2018