News

SapuraKencana has been awarded 3 new contracts and 1 contract extension for its drilling business with collectively value of US$700m or RM2.3bn. The contract details are as below:

1) SKD T-9 – For a period of 5+2 years and commences from July 2014 to June 2019.

2) SKD T-10 - For a period of 3+2 years and commences from August 2014 to June 2017. Both SKD T-9 and T-10 are contracted by Petronas for its drilling campaign offshore Malaysia.

3) SKD T-18 – For a period of 5 years and commences from June 2014 to June May 2019. It will used by Chevron in offshore Thailand.

4) SKD Jaya – For a period of 1 year and commences from August 2014 to July 2015 in Trinidad & Tobago.

Financial impact

We are positive on the contract awards and this will be part of our assumption on orderbook replenishment. We have factored in RM3.8bn contract replenishment for FY15.

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 believe the market has underappreciated the potential value from recent acquisition of Newfield’s asset. The company has made four significant gas discoveries in the SK408 gas field, offshore Sarawak recently. Potential inking of gas sales agreement will upgrade the 2C reserves to 2P reserves. As for theSK310 and SK410 gas fields, production would start in 2016 and 2017 respectively with significant development cost of around US$727m over 2-5 years in order to monetise the asset.

Moreover, 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.

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 - 17 Jun 2014