- 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 group secured a 4-year contract worth RM62mil to provide subsea inspection services for Carigali Hess' facilities which includes the inspection of jackets, pipelines and floating storage and offloading vessel.

- We expect this contract to be undertaken by the group’s wholly owned Allied Marine & Services, which was awarded a RM700mil underwater inspection, repair and maintenance services by Petronas Carigali in November last year.

- Including this contract, the total 2013 value of contracts secured by SapuraKencana to date has reached RM9.9bil, of which the largest job was Petrobras’ US$2.7bil charter for 3 additional flexible pipelay vessels. Hence, we expect negligible impact to the group’s outstanding order book of RM24.8bil- 2.9x FY15F revenue.

- But the excitement for SapuraKencana lies in the recent game-changing US$898mil (RM2.8bil) acquisition of Newfield International’s oil & gas production blocks in Peninsula Malaysia, Sabah & Sarawak for. Assuming breakeven cost at US$50/barrel, sales royalty of 10%, Malaysia’s petroleum income tax of 38% and average crude oil price at US$100/barrel, we estimate that the daily production rate of 23,000 barrels of oil equivalents (boe) could yield a highly accretive net profit of US$208mil (vs. Newfield’s 2012 Malaysian earnings of US$239mil), which translates to a highly EPS-enhancing acquisition PE of 4.3x.

- This leads to a potential FY15F earnings increase of 43%, and subsequently to higher fair values but we maintain SapuraKencana’s FY14F-FY16F earnings for now pending further clarification from management. The Edge reported over the weekend that Newfield’s assets will involve an annual capex of RM800mil to raise the field’s current reserves of 36mil boe and enhance the natural decline of the fields.

- The Edge also reported the group’s president/CEO Tan Sri Shahril Shamsuddin as saying that the company is also eyeing Newfield’s China assets, which generated a 2012 profit of US$30mil and has total assets of US$347mil and reserves of 38mil boe.

- SapuraKencana together with its existing risk-sharing contract (RSC) partner Petrofac is also looking to tender for Petronas’ blocks PM-6 and PM-9 as well as two more marginal fields. If these are successful, SapuraKencana could be further elevated to become a truly formidable regional O&G upstream operator. Valuation remains attractive at the current FY15F PE of 20x, which is at a 31% discount to SapuraCrest Petroleum’s peak of 29x in 2007.

Source: AmeSecurities