News

SapuraKencana has secured multiple contracts with collectively value of US$312m or RM1bn. The contract details are as below:

1) Drilling division – provision of SKD T-20 in the Espoir Field with primary term of ten firm wells with option for additional four single well;

2) Offshore construction and subsea division; and

i) SK 1200 – Transportation of Exxon’s temporary living quarters with firm period of 55 days and option of 15 daily extensions;

ii) TL Offshore - Provision of transportation and installation works from Larsen & Toubro; and

iii) SapuraAcergy- Provision of subsea services for the Maharaja Lela South Project.

3) Fabrication, Hook-up and commissioning – Provision of detailed engineering, procurement, construction, and commissioning for the Layang Development project for a period of two years and expected to be completed by 2Q16.

Financial impact

We are positive on the contract awards and this will increase its orderbook by RM1bn to RM28bn.

Pros/Cons

We are positive on the award and maintain our view that SapuraKencana is a proxy to global growth in offshore O&G capex spending. The multiple contracts award also shows plenty of oil and gas works are still ongoing especially on the global upstream E&P given high oil price. 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. 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 this will be part of our assumption on orderbook replenishment. We have factored in RM3.8bn contract replenishment for FY15.

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 unchanged 20x FY01/16 EPS of 27.6 sen/share.

Source:Hong Leong Investment Bank Research - 16 May 2014