- We maintain our BUY recommendation on SapuraKencana Petroleum (SapuraKencana), with an unchanged fair value of RM3.70/share, pegged to an FY14F PE of 22x – on par with Kencana Petroleum’s 2007 peak.

- Following our visit yesterday, together with some of the group’s bankers, to see the pipe-lay heavy-lift construction vessel Sapura3000, we maintain FY14F-FY16F earnings.

- Sapura3000, 50%-owned by SapuraKencana, had undergone a mandatory dry-dock for repair and maintenance for 52 days at Keppel yard in Jurong, Singapore after its job was completed in the Gulf of Mexico. The vessel will be leaving to complete its pipelaying and commissioning project for the Gumusut-Kakap deepwater field, off Sabah.

- This is currently the most advanced and versatile pipelaying construction vessel with dynamic positioning system in the region. But there will be two more derrick-lay vessels, currently being constructed in China, which will be added to the fleet in 4Q2013-1Q2014.

- Upstream reported that the group’s 50:50 JV with Seadrill is expected to secure three additional flexible pipe-lay support vessel (PLSV) charter from Petrobras, doubling to six such vessels operating offshore Brazil’s pre-salt area. Expected to be announced over the next two months, the new PLSV charters are expected to continue to drive the group’s forward earnings momentum after the transformative valuation kicker from Seadrill’s tender rig injection.

- Likely to be built by IHC Merwede in the Netherlands, each 550-tonne PLSV will cost around US$300mil, similar to the earlier 3 vessels for Petrobras. This is expected to raise the group’s projected capex of US$1.4bil to US$1.9bil.

- As an estimated US$700mil of the debt under the JV with Seadrill will be off-balance sheet, we do not expect the group to undertake another equity raising exercise so soon with the US$2.9bil acquisition of tender rigs from Seadrill expected to be completed by the end of this month.

- The group’s FY14F EPS is expected to accelerate by 59% from the acquisition of Seadrill’s assets and full-year accounting for the merger between SapuraCrest and Kencana Petroleum. Hence, with the sector’s largest order book of RM18bil (including Seadrill’s tender rigs), SapuraKencana remains our top pick for the oil & gas industry.

- Valuation remains attractive at an FY14F PE of 18x, which is at an 18% discount to Kencana Petroleum’s peak in 2007.

Source: AmeSecurities