News

TheEdge Malaysia reported SapuraKencana is close to securing as much as US$400m (RM1.3bn) in drilling contracts in Africa and Southeast Asia.

According to sources, an announcement could be made as early as April. There are few contracts being negotiated, a couple in Africa and a few more in Southeast Asia, collectively worth US$400m. The contract in Africa could be a new business venture, while the Southeast Asian deal is likely to be an extension of existing contract.

Financial impact

We are positive on the potential award and if materialise, will boost its orderbook by 5% from RM25.4bn to RM26.7bn.

Pros/Cons

Four rig contracts will expire in 1QFY15 and company is negotiating on extension contract. We believe this will be part of the US$400m contract award. We understand the company is bidding for projects in Africa given the increasing E&P activities in the region.

In addition, we expect increasing fabrication job order going forward and estimated more than RM10bn worth of potential contract to be awarded. Several centralized processing platforms (CPPs) are likely to be awarded in 2014 such as Semarang, Bokur, Dulang, Guntong Baram Delta and Sepat.

We believe the recent acquisition of Newfield’s asset will help SapuraKencana to diversify its portfolio of business and gain immediate foothold and recognition as an upstream resource owner and operator. To note, there will be upside to the current 2P reserves of 36m given the huge estimation of GIIP for SK310 and SK408 gas fields. To note, the new gas fields would only start production in 2016 and 2017 with significant development cost of around US$727m over 2-5 years in order to monetise the asset.

Risks

Execution risk, escalation of vessel and fabrication costs.

Forecasts

Unchanged.

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 RM5.52 based on 20x FY01/16 EPS of 27.6 sen/share.

Source: Hong Leong Investment Bank Research - 31 Mar 2014