- We maintain our BUY recommendation on SapuraKencana Petroleum (SapuraKencana), with a higher fair value of RM5.70/share (from an earlier RM4.65/share) - based on an FY15 PE of 22x, which is the 2007 peak achieved by Kencana Petroleum.

- The valuation kicker stems from the raising of our FY15FFY16F earnings by 15%-23%, underpinned by the

US$898mil (RM2.8bil) acquisition of Newfield Exploration Co’s interests in 9 Malaysian production sharing contracts (PSCs).

- Our forecasts for the contributions from the Newfield PSCs assume a natural production decline of 10% in CY13F and 5% annually thereafter. Note that we have adopted a conservative stance as management had earlier indicated expectations of production trending upwards due to planned infield enhancements.

- We have also incorporated a one-off 7-month Newfield PSC earnings addition of RM215mil (+14%) in FY15F as the assets will retroactively commence contribution from 1 July this year, even though the transaction is expected to be completed on 10 February 2014. This is not reflected in our FY15F core EPS.

- We estimate that the group’s gross gearing will rise from 1x in FY15F to 1.1x due to the Newfield asset purchase together with development capex estimated at US$1.7bil for SK310 (expected to commence gas production in FY19F) and exploration costs of US$217mil for SK408.

- Hence, we remain confident that the group will not embark on an equity raising exercise in the near future, if there are no further major acquisitions in the pipeline.

- We remain positive on the group’s game-changing plan to become the first Malaysian company with a Petronas’ PSC concession given:- (1) The potential increase in the fields’ reserves from exploration activities and daily production rate from infield enhancements; and (2) Synergies with the group’s other businesses such as drilling and engineering, procurement, construction, installation and commissioning segments as well as the opening of new upstream opportunities in Southeast Asia.

- As SapuraKencana is poised to become a truly formidable regional O&G upstream operator, its share price has outpaced the FBMKLCI by 55% over the past 12 months. But its aggressive acquisitive earnings acceleration (+94% in FY14F) translates to a still attractive FY15F PE of 17x currently, which is at a 41% discount to SapuraCrest Petroleum’s PP 12247/06/2013 (032380) peak of 29x in 2007.

Source: AmeSecurities