We maintain our HOLD rating on SapuraKencana Petroleum with a lower fair value of RM2.50/share (from RM2.80/share earlier), based on an unchanged FY16F PE of 12x. This is below its 3-year average of 16x, given the current era of lower oil prices, slowing capex cycle, and near-term earnings weakness.

We cut FY15F-FY17F earnings by 5-7%, as we lower our tender rig charter rates assumptions by 5% and reduce EBIT margins for the fabrication, hook-up and commissioning (FHUC) segment by 2ppts.

We believe it is too early to turn constructive on the stock at this juncture, as the market’s negative earnings revision cycle would likely continue. Our primary concern centres on the impairment of Newfield’s assets which were acquired when oil prices were more than USD100/barrel.

However, we believe that this may be offset by the additional gas reserve that was discovered in June 2014 in the SK408 block, which effectively doubled the initial total gas reserve when the assets were acquired. Our earnings estimates have not accounted for any impairment at this juncture.

Given the current oversupply in the rigs market globally, we believe the effect would be cascaded down to SapuraKencana. Although tender rigs are less impacted when compared with jack-ups (as tender rigs are more exposed to the production phase), we nevertheless see softer charter rates for its fleet going forward. We understand that 3-4 tender rigs will be up for renewal in FY6.

Overall, contract flows have slowed down given that oil companies are cutting capex. Impact would be greatest on its fabrication division due to margin compressions and challenges in replenishing its orderbook. Having said that, earnings would be supported by the OCSS segment given the long-term nature of its contracts.

SapuraKencana’s 50%-owned pipelay support vessels chartered by Petrobras will contribute more meaningfully from 4QFY15 onwards. Sapura Diamante and Sapura Topazio, which have both seen high uptime, began operations in June and September 2014, respectively. Four remaining vessels will join the fleet until 2016.

The stock now trades at an FY16F PE of 11x.

Source: AmeSecurities Research - 20 Mar 2015