News

Petronas has awarded the Pan Malaysia Integrated Offshore Installation Contract covering domestic upstream oil and gas offshore Transportation and Installation (T&I) activities for a period of 3 years commencing year 2014.

The total work value under this contract is estimated to be almost RM10bn subdivided into four packages, and was awarded to TL Offshore Sdn Bhd (SapuraKencana), PBJV Sdn Bhd (Barakah) and GOM Resources Sdn Bhd (Puncak Niaga). The work involves the transportation and installation for offshore facilities and includes all the necessary services required for the execution of the scopes such as marine spread services, required tools, specialized equipment and manpower services.

Highlights

We understand that SapuraKencana had secured the Package C and D after Barakah and Puncak Niaga winning the Package A and B respectively. All the packages are on 3 years duration (2014-2016), with an option to extend for another year. The total contract value is estimated around RM10bn with Package A (RM1.5bn), B (RM1.8bn) and C & D (RM6.7bn).

The contract win is within our expectation as the company is the incumbent for 3 of the current Pan Malaysia T&I packages. We believe the Package E has been merged into C and D due to its small contract size. We understand that the C&D package requires vessels with minimum heavy lift capacity of 2000MT. The company is expected to mobilise its derrick lay vessels QP2000 and LTS3000 for this Pan Malaysia contract.

The Package C & D contract value translates to RM2.2bn revenue per annum. However, we maintain our earnings forecast as we already factored in our contract replenish assumptions. The current outstanding orderbook will balloon from RM23bn to RM30bn.

The acquisition of Newfield asset is expected to complete in 1Q14. While we are optimistic that the acquisition will help SapuraKencana to gain immediate foothold and recognition as an upstream resource owner and operator, successful execution and integration of the Newfield asset will be required for re-rating of the stock. Our forecasts have yet to incorporate any earnings from the Newfield pending completion of the deal.

Risks

Execution risk, escalation of vessel and fabrication costs.

Forecasts

Unchanged pending completion of Newfield’s deal.

Rating

HOLD

Positives – Strong balance sheet and knowhow, global trend towards offshore production.

Negatives – Increased competition for growth markets, complexities of running a larger organization.

Valuation

As our current TP only provides 3% upside (YTD already +45,4%), we downgrade from BUY to HOLD with an unchanged TP of RM4.74 based on 20x FY01/15 EPS of 23.7 sen/share.

Source: Hong Leong Investment Bank Research- 16 Dec 2013