- We maintain our BUY recommendation on SapuraKencana Petroleum (SapuraKencana), with an unchanged fair value of RM5.70/share, based on an FY15 PE of 25x, which is the 2007 peak achieved by Kencana Petroleum.

-  The Edge Malaysia reported that SapuraKencana has made another massive gas discovery in the SK408 production sharing contract off Sarawak, with over 1 trillion cu feet (tcf) of gas found in the first of five exploratory wells in the area, which are part of a total 10-well commitment.

-  This is the second major find bySapuraKencana, which had announced 1.5 tcf of gas in four exploratory wells drilled in the same block in June this year. While the group has not made any official announcement yet on this development, this augurs well for the group’s purchase of Newfield’s assets in Malaysia.

-  If the probable and proven reserves for SK408 are determined at 1.5 tcf, this will raise the group’s total proven and probable reserves by 250mil boe (7.9x) from 36mil boe currently to 286 mil boe.

-  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.

-  The group is the operator 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.

-  We understand that these results help to ascertain EnergyQuest’s earlier estimates of 2.8 trillion cu feet of gas (467mil barrel of oil equivalent) for Block 408. Note that the estimated reserves of SK408 as well as 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 forecast for now and remain positive on the group’s integrated upstream O&G service profile.

-  The increasingly visible pipeline of new contracts in offshore construction and its fresh tenders of RM30bil underpin the group’s strong earnings outlook. Since the beginning of 2014, the group has secured RM6bil worth of new contracts. The group’s outstanding order book stands at RM30bil (2.7x of FY15F revenue) and remains the largest within the O&G sector – above Bumi Armada’s firm orders of RM22.7bil.

-  The stock still trades at an attractive FY16F PE of 17x currently – a 41% discount to SapuraCrest Petroleum’s peak of 29x back in 2007.

Source: AmeSecurities