SAPNRG, in partnership with Petrofrac, is reported to have secured an EPC contract from ADNOC for the Dalma Gas Development Project, worth in total USD591m. Assuming 50:50 stakes in the partnership, this means SAPNRG’s portion could be worth ~USD296m. Overall, we are positive on the win, with this being its first contract award in UAE. Maintain OP and TP of RM0.33.

Secures contract from ADNOC. The press has reported that SAPNRG, via its partnership with Petrofrac Emirates LLC, has secured a contract from the Abu Dhabi National Oil Company (ADNOC), for the Dalma Gas Development Project.

The scope of works includes: engineering, procurement, fabrication, transportation, construction, installation, testing and commissioning of all offshore facilities, several wellhead platforms, 189km of subsea pipelines, cables and umbilical forming the Dalma Gas Development Project.

Takeaways from the contract award. Overall, we are positive on the new win, with this being SAPNRG’s first job in the UAE. According to

Upstream, the package for the contract is reported to be worth USD591m. Assuming a 50:50 partnership, SAPNRG’s stake would thus be worth USD296m (or ~RM1.2b). Considering the competition, having successfully fought off McDermott International and Saipem who were thought to be contending bidders, we believe margins for the project could be around the low-teens percentage. This also represents SAPNRG’s first (known) contract win in FY21, bringing its order-book to a guesstimated value of ~RM16b. On a bigger picture, the win could also help build SAPNRG’s track record in the region, enabling further job wins in the future. This award, and together with another onshore package awarded wholly to Petrofac, are understood to be the first major upstream EPC contracts dished out by ADNOC this year, with more than USD10b worth of projects understood to be in the tendering stage but yet to be awarded. Meanwhile, to recap, SAPNRG is also one the players under Saudi Aramco’s long-term agreement (LTA), thus qualifying it for direct tenders for jobs from Aramco. The Middle East is the single largest region for SAPNRG’s tender book, making up about ~32% of ~USD8b tender-book, and as such, we believe strengthening its position in the region would be target for the company.

Maintain OUTPERFORM, with unchanged TP of RM0.33, pegged to 0.4x FY20E PBV. No changes were made to our FY20-21E numbers, as it is still within our FY21E order-book replenishment assumption of RM5b. Our OP call is premised on the stock currently trading at floor valuations of merely 0.3x PBV, and below its rights issue exercise price of RM0.30. We believe earnings turnaround is a long-term eventuality, with all the fundamental building blocks gradually put in place, such as: (i) strong order-book backed by job wins, (ii) finance and depreciation expenses now much palatable post-rights and impairments, (iii) gradual increase in drilling rigs utilisation, and (iv) first gas from SK408 to boost E&P segment.

Risks to our call include: (i) lower-than-expected order-book replenishment, (ii) costs overruns, (iii) poorer-than-expected drilling rigs utilisation, (iv) lower-than-expected E&P production volumes, and (v) poorer-than-expected operating margins.

Source: Kenanga Research - 20 Feb 2020