Sapura Energy’s (SAPE) wider 1QFY19 loss did not come as a surprise, as we had anticipated another weak quarter. E&C and drilling revenues continued to be impacted by weak asset utilisation. We however believe that losses have hit bottom, and now at an inflection point towards a gradual earnings recovery. We upgrade SAPE to HOLD and raise our target price to RM0.65 on limited downside risks to both share price and earnings.

Weak Results Likely at the End of Tunnel

After excluding RM31m unrealised forex gains, SAPE’s 1QFY19 core losses came in at RM167m, which was slightly above our expectations, but below consensus, which forecasted a lower loss of RM82m.

Sequentially Weaker Across the Board

The E&C segment posted a sequentially flat revenue, but to our surprise reported a RM36.5m profit vis-à-vis the RM84m losses in 4QFY18. This was attributable to the doubling in operating profit in Brazil, as a result of better utilisations. On top of that, SAPE recorded some residual winding cost of SapuraAcergy in the previous quarter which was absent in 1QFY19. Drilling revenue fell 20% due to the lack of 2 months contribution from SKD Esperanza, which resulted in a RM69m loss. Energy revenue declined 27% qoq despite similar 1.1mmbbl lifting volume and US$70/bbl oil price, due to higher gas-to-oil mix, which garnered a lower ASP. The higher depreciation and interest cost following B15 field first gas also dragged down the division profit by 66%.

Operation Update

5 out of the total 15 rigs were operating in 1QFY19 (SKD T9, T17, T18, Pelaut and Esperanza). Alliance and Berani will commence operation by May-18 and 3QCY18. SAPE secured RM4.5bn contracts win YTD, which brought current outstanding order book to RM16.7bn (4QFY18: RM16.6bn). SAPE completed 7 infill drilling programme in FY18, replenishing an additional 300kbpd to production and in the process of obtaining approval for another 6 wells in FY19, targeting to raise similar volume. Net gearing increased from 1.56x to 1.61x qoq due to higher cash burn rate. As of May-18, foreign shareholding stood at 22% (May-17: 33%)

Source: Affin Hwang Research - 2 Jul 2018