Company Insight

We recently met management of our top pick in the O&G segment, for an update on the company following the end of a prolonged period of perceived election uncertainty. The company remains optimistic on the prospects of offshore O&G services especially the Tender rig drilling solutions space.

The Seadrill deal was completed smoothly end April, hence it is probable that the Tender rig contribution will be higher than our conservative estimates. We expected completion and recognition of revenue mid FY01/14. SapuraKencana is running the Berantai marginal field smoothly and above expectations. Currently, the field is producing an additional 7% above the target of 150mscf/day after drilling only 13 of the planned 18 wells.

Comment

We came away from the visit even more optimistic as SapuraKencana continues to surprise on the upside. There is upside to our recognition of the Seadrill Tender business this year as well as in our conservative PBT drilling margin assumptions of 28.5%. We are pleasantly surprised that performance for the Berantai field has been above expectation. In our report titled ‘O&G stocks to Release More Alpha in 2013’, we advocated that certain competent domestic firms have huge upside before they fully reflect the current O&G upcycle. Sapura Kencana is our top pick and the ability to execute Berantai reiterates our view.

Fears of market overhang after the listing of placement shares on 29 Apr did not materialise, In our Note dated 5 Apr 2013, we alluded to this as the placement was made to value investors. In addition, perceived political connection was holding back price and any weakness is chance to accumulate and build sizeable position. Share price movement suggest this thesis was sound.

There is still substantial upside as we believe the market has not fully factored in the accretive nature of the Seadrill Tender business i.e The partnership with power house Seadrill which includes the potential win of 3 pipelay barge contracts in Brazil. In addition, we believe the O&G upcylce is in its early stages, detailed in our report titled ‘Evolution of an Upcycle dated 16 April 2013.

Risks

• Execution risk,
• Escalation of vessel, fabrication and drilling costs.

Forecasts

• Maintained.

Rating

BUY

• Positives –
  • Strong balance sheet and knowhow,
  • Global trend towards offshore production.
• Negatives –
  • Increased competition for growth markets.
  • Complexities of running a larger organization.

Valuation

• Maintain BUY call with an unchanged TP of RM4.40 based on 20x EPS of 22 sen/share based on FY01/15 EPS.

Source: Hong Leong Investment Bank Research - 9 May 2013