- We upgrade SapuraKencana Petroleum to a BUY recommendation with an unchanged fair value of RM2.70/share, pegged to an FY16F PE of 14x, which is at one standard deviation below its historical three-year mean of 18x.

- Although we believe SapuraKencana’s near-term share price sentiment will continue to be driven by the volatility of crude oil price, we note that our upgrade is premised on its trough valuation which is currently at its all-time low of two standard deviations below its historical average. Year-to-date, its share price has declined by 27% and is trading at 0.8x book value.

- We are also assured following our checks that there is no significant impact to the group from the weakening MYR against USD. The group’s FX exposure is naturally hedged as the composition of the currency of its debts follows the cash flow of its operations. As at 30 April 2015, 82% of its borrowings are denominated in USD.

- Negotiations on the gas sales agreement with Petronas are still ongoing. Once concluded, this will be a catalyst for the group as it will be able to monetise its substantial gas reserves. We now expect the deal to be concluded by 2016.

- The development concept has been finalised for the SK310 block; it is expected to commence development this year with first gas targeted for the second quarter of 2017. A capex of USD300mil will be incurred on a gross basis for this development, which includes a wellhead platform, pipelines, and drilling costs.

- We understand that SapuraKencana is actively bidding for more EPCIC jobs currently. Upstream reported that the group is currently competing for Thailand’s PTTEP multi-year turnkey contract to build 12 wellhead platforms on a confirmed basis with options for another 13 platforms. In addition, each platform brings with it associated subsea pipelines, tie-in work, brownfield modifications, and the supply of other subsea equipment. The contract is expected to be awarded in August or September 2015.

- Elsewhere, we understand that the third pipelay support vessel (PLSV), Sapura Onix has arrived in Brazilian waters to be delivered to Petrobras, while three additional units are expected to be delivered in 2016. Sapura Diamante and Sapura Topazio are currently in operations with high utilisation rates of 99%. The PLSVs are expected to contribute ~RM150mil per year upon the delivery of all six PLSVs by FY17F.

Source: AmeSecurities Research - 19 Aug 2015