- We maintain our BUY recommendation on SapuraKencana Petroleum (SapuraKencana), with an unchanged fair value of RM4.65/share – based on an FY15 PE of 22x, which is the 2007 peak achieved by Kencana Petroleum.

- The Edge Malaysia reported over the weekend that SapuraKencana has entered into a partnership with Petronas’ wholly-owned Vestigo Petroleum S/B to bid for the development and production of the Bubu marginal oil field, located off Terengganu. The report said that the exit of a third party could result in SapuraKencana and Vestigo having equal stakes in the risk service contract (RSC).

- If the report is accurate, this will be SapuraKencana’s second RSC, after its 50% stake in Malaysia’s first RSC – i.e. the Berantai marginal field, also off Terengganu. The second and third RSCs for the Balai-Bentara and Kapal-Banang-Meranti clusters were awarded to Roc Oil-Dialog Group-Petronas Carigali and Coastal Energy-Petra Energy joint-ventures respectively.

- The fourth RSC awarded to Cue Energy Resources-Scomi Group JV was eventually aborted and passed to Vestigo, Petronas’ vehicle to complement and expedite the development of marginal oilfields with other parties.

- There is no indication yet of the value of investment required for the Bubu RSC, but we understand that it could be smaller than Berantai’s US$800mil-US$1bil.

- Assuming a 20:80 equity-to-debt ratio, capex of US$800mil, a 50% equity stake in the Bubu RSC and including capex for the recent Petrobras flexible pipelaying charter contract, we expect Sapurakencana’s net gearing to rise from 0.9x currently to 1.3x by FY2015. For now, we maintain our FY14F-FY16F earnings pending an official announcement.

- But we acknowledge that there is a possibility of another equity raising exercise if the group successfully secures the tender for some of the large production blocks of US-based Newfield Exploration Co, which intents to dispose its non-US based assets, reportedly valued at US$1.7bil (RM5.4bil). While most of the group’s debts are currently project-financed, we note that upstream investments carry a higher risk profile despite higher potential long-term returns.

- Currently, the group’s order book of RM26.5bil translates to 3.5x FY14F revenue. Since the beginning of the year, the group has secured RM9.9bil of new orders, of which the largest was the US$2.7bil (RM8.6bil) charter for 3 new flexible pipelaying support vessels from Petrobras. Valuation remains attractive at the current FY15F PE of 17x, which is at a 23% discount to PP 12247/06/2013 (032380) Kencana Petroleum’s peak in 2007.

Source: AmeSecurities