News  Yesterday, SapuraKencana Petroleum (SKPETRO) announced that its wholly-owned drilling subsidiaries

(for drilling rigs SKD T-9, SKD T-10, SKD T-18 and SKD Jaya) have been awarded three new contracts and an extension contract worth a cumulative c.USD700m (c.RM2.3b).

Comments  We are positive on these contract wins which highlight SKPETRO’s ability to continue winning contracts for its drilling division.

 No contract value breakdown was announced for the contracts but assuming we use the previous daily charter rates (DCR) (please refer to table on next page) as a base-point for the new contracts, we estimate that there have been DCR escalations for the new wins; more likely for the international ones (SKD T-18 and SKD Jaya).

Outlook  SKPETRO is looking to announce its 1Q15 results by end of this week; which we believe will be weaker from a full-year standpoint due to the monsoon season. Reported earnings could also be skewed by one-off contributions from Newfield, given SKPETRO can recognise economic benefits of Newfield from July-CY13 onwards. We hope to exclude this during our analysis.

 At our last count, SKPETRO’s order book stood at RM30b.

 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 are keeping our forecast for now as we have already imputed the contract new wins and replenishments for drilling division.

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 18.7-15.9x (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