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.

• Sapura and its partners Sarawak Shell and Petronas Carigali have made its ninth gas discovery offshore Sarawak in the Pepulut-1 exploration well, which encountered a high quality reservoir, following the completion of its 2017 drilling campaign within the SK408 production sharing contract (PSC). Sapura E&P is the development and production operator with a 40% working interest in the SK408 development.

• The estimated reserve for Pepulut has not been revealed yet. Even so, pending the signing of a gas sales agreement with Petronas, which underpins project feasibility, any estimate is likely to be categorized as 2C, not 2P at this juncture.

• Given that this field is in the vicinity of the Gorek, Larak and Bakong fields of phase 1 in the SK408 PSC, which achieved final investment decision in April this year, we expect this discovery to further enhance the viability of this project cluster by leveraging on the common infrastructure, pipelines and facilities.

• As the first 3 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. The group already secured 2 Hess wellhead platforms and the Pegaga central processing platform from Mubadala Petroleum.

• E&P’s FY20F production is expected to fall by 12% YoY from natural decline. However, the Gorek, Larak and Bakong gas fields in the US$200mil Phase 1 of the SK408 PSC are targeted to commence production in FY21F, radically transforming annual gas output from 2mil boe by 10x to 12mil boe and propel overall hydrocarbon production to 13.4mil boe, up 3.8x from 3.5mil in FY18.

• The fields under the SK408 gas field development project, which have an estimated reserve of 6tril 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.

• With crude oil prices now trading above US$75/barrel, the limelight has returned to Sapura's exploration and production (E&P) operation, with its proposed listing becoming much more likely, reinvigorating the group's overall re-rating process. Hence, we believe that the stock is trading at an unjustified 0.2x of our SOP of RM2.76 and 0.4x book value (vs. 0.9x for Bumi Armada).

Source: AmInvest Research - 12 Jun 2018