News  Yesterday, SapuraKencana Petroleum’s (SKPETRO) subsidiary; SapuraKencana Energy Sarawak Inc.

(“SKE”); announced that it has made four significant discoveries of non-associated natural gas in the SK408 Production Sharing Contract (PSC) area, offshore Sarawak, Malaysia.

 These are the first four wells out of total 10 wells commitment in the SK408 PSC.

 SKPETRO is the operator with a 40% working interest partnering PETRONAS-Carigali Sdn. Bhd. (30%) and Sarawak Shell Bhd. (30%) in the SK408 PSC.

Comments  We are positive on the encouraging news as it shows that SKPETRO’s effort on the SK408 PSC is worthwhile.

 No previous expenditure was guided in the announcement but back in Nov-13, management had guided that this consortium will spend a total gross CAPEX of USD217.0m for the 10 well commitments.

 Assuming each well is price similarly, this implies that SKPETRO could have spent approximately USD34.7m (RM112.8m) on the four well discoveries based on its 40% stake.

Outlook  At our last count, SKPETRO’s orderbook stood at RM28b.

 Tender book was guided to be within RM25b.

 We believe SKPETRO is scheduled to: (i) begin the new campaign for Pan-Malaysia Transport and Installation (T&I) contract, (ii) receive two DLBs and KM-2, (iii) kick-start two Brazilian pipelay-support vessels (PLSV), and (iv) account for Newfield’s earnings in CY14. All these will provide near-term catalysts for the stock.

 For Newfield projects; targets are to transform the SK310 discoveries to 2P reserves by end-CY14. For now, the resources are estimated to be at 1.5-3.0 tcf.

Forecast  We maintain our forecasts for now given that the commercialisation of the resources of SK408 will likely only be achieved in later years.

Rating Maintain OUTPERFORM

Valuation  Our TP of RM5.57 is unchanged based on a CY15 EPS of 26.5 sen and target PER of 22x.

 The c.20% premium ascribed to SKPETRO (versus the 18x PER ascribed to MHB) is justified, in our view, as it is the only integrated Malaysian upstream player (from E&P to installation).

 Moreover, the stock is currently still attractively priced at CY14-15 PER of 17.7-15.0x (vis-à-vis other heavyweights such as UMW O&G that trades at CY14-15 PER of 31.8-20.5x.

Risks to Our Call   (i) Lower-than-expected margins for business segments

 (ii) Lower-than-expected contract replenishment.

Source: Kenanga