News

TheEdge Weekly reported that SapuraKencana has made a massive gas discovery in its 40% owned SK408 field.

According to industry sources, the new find has discovered more than 1tcf of gas in a single well in the block. This is one of the five well in the 10-well commitment in SK408 PSC.

To note, the company has just announced four significant discoveries in SK408 two months ago.

Financial impact

We understand that for SK408 gas field, the size of reserve is almost same or larger than SK310 and it is surrounded by proven oilfields with 45-55% chance of success rate. With estimation of Gas Initially In Place (GIIP) of 2tcf and average recovery factor of 50%, 172m barrel of oil equivalent (BOE) is expected to be recoverd (~4x of current 2P reserves of 36m).

Pros/Cons

We are positive on the purported gas discoveries although the exploration plan at SK408 is part of the commitment campaign. We understand the first gas is likely to be in FY18 with production to last up to 20 years.

We believe the market has underappreciated the potential value from recent acquisition of Newfield’s asset. Potential inking of gas sales agreement will upgrade the 2C reserves to 2P reserves. As for the SK310 and SK408 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.

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 end of the year or early next year such as Semarang, Bokur, Dulang, Guntong Baram Delta and Sepat.

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

Source: Hong Leong Investment Bank Research - 25 Aug 2014