Update

• Sapura Energy’s fully-owned subsidiary Sapura Upstream has signed farm-in agreements to three offshore exploration permits held by Finder Exploration Pty Ltd in Australia.

• Following the agreements, subject to approval, Sapura will acquire 70% interest in all 3 exploration permits with Finder holding the remaining 30%.

• All 3 exploration permits are located in North West Shelf off Western Australia, namely: - The EP 483 & TP/25 permit is located in shallow water at the southern margins of the Carnarvon Basin and is close to infrastructure - The WA-412-P permit is located in the northern region of the Carnarvon Basin and is adjacent to several large oil and gas fields - The AC/P 61 permit is situated at the Vulcan Sub basin, where it is surrounded by oil and gas discoveries

• The joint venture between Sapura Upstream and Finders plans to drill two exploration wells in the Carnavon Basin permits between 2019 and 2020 and also plans to acquire seismic data in AC/P 61 in 2019.

• Positive move. The foray into Australia came after its venture into New Zealand in March and Mexico in June. We view the latest announcement as positive to the long-term development of Sapura’s Exploration and Production (E&P) division.

Earnings Outlook

• Earnings forecast maintained – We are keeping our EPS forecasts with no earnings contribution expected from Australia in the near term.

• Prospects are expected to be flat until earnings stream start to flow from the SK408 field and activity in the oil and gas industry takes off next year. The SK408 field will come on stream in late 2019. Sapura’s net reserve stands at 253 mmboe (95% gas, 5% oil) that could last for over a decade.

Valuation & Recommendation

• We are upgrading our recommendation to BUY from HOLD with an unchanged target price of RM0.42 (based on 0.5x P/B and a NTA of RM0.84 per share) following the recent selldown in share price after the proposed rights issue.
   
• Future catalyst – Share price was bogged down by the recent cash call announcement. However, investor sentiment could improve with the potential listing of its E&P division and possible strategic partnership for its loss-making Drilling division.

Source: JF Apex Securities Research - 5 Sept 2018