- We maintain BUY on SapuraKencana Petroleum with an unchanged fair value of RM2.45/share, pegged to an FY16F PE of 14x.

- As guided by our earlier reports, SapuraKencana has secured approval from Petronas for the SK310 B15 gas field development project, off the coast of Sarawak. Our channel checks reveal that the parties have come to an agreement for the gas sale, in principle, although the terms remain confidential.

- The group will commence the development phase, which will involve a capex of US$300mil to build a central processing platform with a 35-km gas evacuation pipeline tied into existing infrastructure. The first gas delivery is expected in 4Q2017.

- The B15 field, which has proven reserves of 300 billion cu feet of gas, is expected to produce 100 mmscfd (million standard cubic feet per day) of hydrocarbon gas for Petronas’ LNG complex in Bintulu, Sarawak. The B15 field was discovered in December 2010 under Newfield International Holdings, which eventually sold its entire Malaysian assets to SapuraKencana in 2013. SapuraKencana is the operator of the SK310 Production Sharing Contract with a 30% participating interest, while Petronas Carigali Sdn Bhd holds 40% and Mitsubishi Corporation’s Diamond Energy Sarawak Sdn Bhd the remaining 30%.

- The next likely field development in the pipeline would be SK408, which has probable reserves of 3 trillion cu feet (tcf) of gas. The group has successfully drilled 5 wells to date for SK408 and another 3 are in the programme before the partners decide on the field development plan. SapuraKencana has a 40% stake in SK408, Shell 30% and Petronas Carigali 30%.

- The expected funding for SK310 and SK408 has already been allocated in the group’s US$5bil multi-currency debt refinancing programme from early 2014. Given the associate stake, this development is not expected to raise the group’s gross debt significantly.

- The stock currently trades at an attractive FY16F PE of 12x, below its 2-year average of 17x.

Source: AmeSecurities Research - 5 Nov 2015