Investment Highlights

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

• We remain positive on Sapura’s potential listing of its Exploration and Production (E&P) division as the group together with its partners Petronas Carigali and Sarawak Shell have reached Final Investment Decision (FID) to develop the Gorek, Larak and Bakong fields as phase 1 in the SK408 Production Sharing Contract following the signing of the key terms to the gas sales agreement.

• As the fields will be developed as 3 separate wellhead platforms tied back to the existing processing facility and to the MLNG complex in Bintulu, we expect Sapura’s fabrication yard utilisation to improve significantly towards the end of the year, with the group already securing 2 Hess wellhead platforms and the Pegaga central processing platform from Mubadala Petroleum.

• Upon commencement of production by 4QFY20F, the three fields could cause Sapura’s E&P’s current gas production of 100mmscfd to soar to 400mmscfd in 1QFY22. All in, Sapura’s daily production could surge 2.5x to 25,000 barrels of oil equivalent.

• The fields under the SK408 gas field development project, which have an estimated reserve of 2.8tril cubic feet of gas, are part of the discoveries made by Sapura E&P in its 2014 drilling campaign. The SK408 gas fields will be Sapura E&P's second major upstream gas development project in East Malaysia, after the successful development and commencement of production from the group’s 30%-owned SK310 B15 gas field late last year.

• Sapura E&P is the development and production operator of the Larak and Bakong fields while Sarawak Shell Berhad is the development and production operator of the Gorek field. Sapura E&P has 40% working interest in the SK408 development.

• The group's E&P pretax profit soared 3.1x QoQ 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. This has largely not included the commencement of 100mil cu ft/day gas production from the SK310 B15 development, which will significantly contribute to the group given that its capex was 45% below budget amid higher crude oil prices.

• 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. Hence, we believe that the 66% discount to book value currently is unjustified vs. 10% for Bumi Armada and 52% for MMHE.

Source: AmInvest Research - 11 Apr 2018