- We maintain our BUY recommendation on SapuraKencana Petroleum (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.

- SapuraKencana announced 4 significant discoveries of nonassociated natural gas in the shallow water SK408 Production Sharing Contract (PSC) area, located 120 kilometres offshore Sarawak covering 4,480 sq km in the prolific Central Luconia Gas Province.

- The group is the operator as well with a 40% working interest in this production sharing contract (PSC) with partners PETRONAS-Carigali Sdn Bhd (30%) and Sarawak Shell Bhd (30%). Recall that the group had acquired this PSC stake as well as Newfield International’s other Malaysian production assets earlier this year for US$898mil (See Table 2).

- The four-well discovery from the first four exploration wells, within a 10-well programme projected to cost US$217mil, was within the primary target of the Late Miocene Carbonate reservoirs. This programme is part of the group’s US$500mil capex over 3 years for its maiden venture into this upstream exploration and development.

- The first well, Teja-1, located 8 km southeast Cili Padi gas field encountered 219 metres of gross column whilst the second well Gorek-1 discovery, located 15 km southeast F23 gas field, a gross gas column of 235 metres. The third well, Legundi-1, located 18 km south F23 gas field encountered a 139 metres gross gas column while the fourth well, Larak-1, located 12 km south of F6 gas field, a gross gas column of 333 metres.

- SK408 Block is located in shallow waters approximately 120 kilometres offshore Sarawak covering an area of approximately 4,480 sq. km in the prolific Central Luconia Gas Province.

- We understand that these results help to ascertain EnergyQuest’s estimates of 2.8 trillion cu feet of gas (467mil barrel of oil equivalent) for Block 408. Note that the estimated reserves of SK408 and SK310’s 250-500mil boe were not included in the group’s initial proven and probable estimate of 36mil boe. Hence, we maintain our earnings forecasts and remain positive on the group’s integrated upstream O&G service profile.

- With the addition of Seadrill’s tender rigs and Newfield’s assets, SapuraKencana’s earnings quality is now increasingly skewed towards a higher recurring profile dominated by long-term charters for tender rigs and construction vessels as well as upstream production and offshore construction.

- Valuation remains attractive at the current FY15F PE of 16x, which is at a 27% discount to Kencana Petroleum’s peak in 2007.

Source: AmeSecurities