News

SapuraKencana announced its wholly-owned subsidiaries have been awarded one new contract and three contract extension for tender rig business. The contract details are as below:

i) SKD Berani - US$108m (new contract), commencing from Apr 14 to Mar 15 with an option for one year extension.

ii) SKD Pelaut – US$92m (extension), commencing from Apr 15 to Mar 17.

iii) SKD Setia – US$164m (extension), commencing from Aug 14 to Jul 16. iv) SKD T-12 – US$90m (extension), commencing from Mar 14 to Mar 16.

Financial impact

We have already factored in the contract replenishment for the four rigs in our earnings forecast.

Pros/Cons

We are positive on the award which came in largely in line with our expectation that drilling activities remain active globally. We maintain our view that SapuraKencana is a proxy to global growth in offshore O&G capex spending.

The charter rate for the four rig contracts is in line with our assumption in earnings forecast. We expect more contract newsflow from the Africa region given its increasing E&P activities.

In addition, we expect increasing fabrication job order going forward with more than RM10bn estimated worth of potential contracts 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 as we have factored in the contract replenishment for the four rigs.

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 - 2 Apr 2014