News

SapuraKencana announced that its wholly-owned subsidiary, Crest Tender Rigs Pte Ltd has been awarded a contract for the Provision of Tender Assist Rig Services for the tender assist rig SKD T-9 by PTTEP International Limited (PTTEPI). The SKD T-9 will be used for its Zawtika development drilling campaign offshore Myanmar.

The contract value is approximately US$40m (RM127.2m) and will be commencing in July 2013 with initial operational period of 300 days.

Comment

The contract award is within expectation as the management has mentioned that T-9 was in the process of finalising another new contract during its 1QFY14 results briefing. This contract win reaffirms our bullish outlook in both the domestic and international drilling markets as demand for drilling campaigns are driven by intensifying offshore exploration and production.

The US$40m contract with 300 operating days translates to US$133k daily charter rate (vs. US$132k in previous contract) in line with our assumptions. This contract makes up 6% and 2% of our drilling rig and total revenue assumptions respectively.

We also believe the market is undervaluing the potential of the drilling segment in Malaysia which is underpinned by massive drilling activities (~22 rigs operating in 2012 and expect to rise to 38 by end 2013) as detailed in our report titled ‘Drilling Tsunami’ dated 05 June 2013. As the world’s largest tender rig operator, SapuraKencana is one of the top picks in the drilling sector. We also like Perisai (BUY) for the related play in drilling segment. In addition, we believe SapuraKencana and its partner has a good chance to secure the US$1.5bn Sepat front end engineering and design (FEED) contract from Petronas.

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 RM4.74 based on 20x EPS of 23.7 sen/share based on FY01/15 EPS.

Source:Hong Leong Investment Bank Research - 15 Jul 2013