- 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.

- We maintain SapuraKencana’s FY14F-FY16F earnings as its 1HFY14 core net profit of RM410mil (excluding RM95mil forex gain on loans to subsidiaries/associates) was generally within expectations, accounting for 43% of our FY14F net profit of RM945mil and 40% of street estimate’s RM1,023mil.

- The group’s 2QFY14 core net profit surged by 86% QoQ to RM267mil (excluding forex gains) largely due to the full contributions of Seadrill’s tender rigs, which was acquired on 30 April 2013. Excluding the additional tender rigs’ earnings, we estimate that SapuraKencana’s 2QFY14 core net profit could have contracted by 30% QoQ instead.

- On a YoY comparison, SapuraKencana’s 1HFY14 earnings rose by 40% due to the Seadrill tender rig acquisition and the merger of SapuraCrest and Kencana Petroleum, which was completed in May last year.

- The absence of significant new orders over the quarter led to the group’s order book sliding slightly by 3% QoQ to RM24.8bil - 3.3x of FY14F revenues. Nevertheless, the group’s massive order book remains the largest within the O&G sector and is still double its nearest peer Bumi Armada’s RM12bil.

- Despite the sheer size of its existing order book, SapuraKencana is currently tendering for new contracts potentially worth RM25bil. While the award of the over RM1bil Semarang central processing platform (CPP) has been deferred, the group is hopeful of securing one of the other 8 CPPs still in the pipeline by this year.

- Besides bidding for some of the large Malaysian production blocks in US-based Newfield Exploration Co’s rationalisation exercise, SapuraKencana together with its existing risksharing contract (RSC) partner Petrofac is looking to tender for Petronas’ matured PM-6 and PM-9 blocks. If successful, this will further integrate SapuraKencana’s upstream operations as it become a more exciting and formidable player in the sector.

- Being Malaysia’s first RSC operator for marginal fields, SapuraKencana - again with Petrofac - is looking to secure 2 more RSCs, with at least one expected to be awarded by Vestigo Petroleum by the end of this year.

- SapuraKencana remains our top pick for the oil & gas industry. Valuation remains attractive at the current FY15F PE of 18x, which is at a 19% discount to Kencana Petroleum’s peak in 2007.

Source: AmeSecurities