News

SapuraKencana announced that it has made another gas discovery from Bakong-1, the fifth and final well from its 2014 drilling campaign under its 40% owned SK408 field.

In addition, SapuraKencana was also awarded a few contracts worth total US$124.3m with breakdown as below:

i) US$89m - offshore pipeline construction in Vietnam.

ii) US$7.3m – Subcontract installation work in Vietnam.

iii) US$28m – T&I of compressor module.

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 recovered (~4x of current 2P reserves of 36m).

In addition, we are positive on the contract awards as this will be part of our orderbook replenishment assumption. 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 and available, especially on the global upstream E&P.

On the SK408 field, the company has just announced four significant discoveries two months ago. 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.

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 - 2 Sep 2014