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

- Upstream has recently reported that a fire had broken out on a tender rig at Murphy Oil’s Kikeh field off Sabah, East Malaysia, delaying the drilling of new development wells and possibly hindering this year’s production. We understand that the tender rig, which is moored to the Kikeh spar, belongs to SapuraKencana.

- Murphy has described the fire as “isolated” and that there were no injuries or pollution associated with the incident. However, repair work is needed for the rig, and this will delay the drilling of new wells on the producing field in accordance with the field development plan.

- The existing production wells and Murphy-operated equipment at the deep-water Kikeh project were unaffected by the fire. Also, planned works to shut in the Kikeh floating production, storage and offloading vessel to tie-in the Siakap North-Petai field have again been pushed back because of bad weather and project execution delays.

- The offshore installation contractor McDermott is continuing the tie-in work that was initially due for completion by 3QCY13.

- As the tender rig is insured, we expect any additional expenses to repair the rig to be minimal. However, there could be losses of charter revenue, potentially over US$100,000 on a daily basis.

- Assuming a 6-month repair & maintenance period at a loss of US$100,000/day, we estimate that there could be a one-off provision of RM60mil – 6% of FY14F net profit. For now, we maintain our forecasts pending guidance from management.

- Despite this setback, we remain positive on SapuraKencana’s prospects given the group’s game-changing US$898mil (RM2.8bil) acquisition of Newfield International’s oil & gas production blocks in Peninsula Malaysia, Sabah & Sarawak.

- As SapuraKencana is poised to become a truly formidable regional O&G upstream operator, its share price has outpaced the FBMKLCI by 46% over the past 12 months.

- But its aggressive acquisitive earnings acceleration (+94% in FY14F & +53% in FY15F) translates to a still attractive FY15F PE of 18x currently, which is at a 38% discount to PP 12247/06/2013 (032380) SapuraCrest Petroleum’s peak of 29x in 2007.

Source: AmeSecurities