SapuraKencana  has  discovered gas  in the fifth well of its  SK408 PSC, which could bring  total GIIP  to 2-3tcf  and  provides significant upside to its 36m boe of 2P resources.  It also announced USD124m T&I contracts for Vietnam and Australia. We are mildly positive given the development costs and long gestation to bring the fields to gas production, but see the stock as BUY for its long-term value. Our FV remains at MYR5.33. 

More gas discovery.  SapuraKencana Energy Sarawak –  the  subsidiary that  assumed  the  Malaysian  assets  of  Newfield  (NFX  US,  NR)  –discovered gas  from Bakong I, the fifth and final well in its 2014 dril ling campaign within the SK408 production sharing contract (PSC) area. This announcement  confirmed  a  news  article  written  about  one  week  ago. According to the article, the new find could amount to 1-1.5 trn cubic feet (tcf)  of  gas.  This,  together  with  the  1.5tcf  of  gas  discoveries  from fourSK408  exploratory  wells made  not long  ago in  June  2014,  could  bring the total gas-initially-in-place (GIIP) closer to 2-3tcf of gas. 

USD124m transportation and installation (T&I)  job wins. The group’ssubsidiary,  TL  Offshore  (TLO),  secured  a  USD89m  T&I  contract  for 151km offshore gas pipeline in Vietnam’s Nam Con Son field and 19km in  Dai  Hung  field  in  3QCY14  and  2QCY15.  TLO  also  secured  a USD7.3m subcontract for the Te Giac Trang Field H5 Wellhead Platform Jacket.  Lastly,  SapuraAcergy  –  a  SapuraKencana-Subsea7  JV  –secured a USD28m T&I contract  of a compressor and condensate pump on a platform in Yolla Field, Australia. Engineering work had begun and the offshore work is expected to commence in 4QCY14 for 8 days.

Cautiously  optimistic.  SK408’s  combined  GIIP  could  equal  to NewField’s  original  1.5-3tcf  estimates  for  the  SK310  PSC  block.  If  we assume  3tcf  GIIP  from  SK408  and  a  50%  recovery  rate,  2P  reserves could  be  enlarged  by  8x  to  280m  from  36m  barrels  of  oil  equivalent (boe).  While this augurs well for the planned gas sales agreement (which is  expected  to  be  signed  by  end-2014/early-2015),  we  are  cautiously optimistic to factor in potential execution risk, given the multiple stages to bring  the fields to  gas production  in 3-5 years  around CY18. In our last company  visit,  management  addressed  concerns  over  the  gas  fields’high  development  costs  –  at  an  estimated  MYR282m  for  SK408  (40% working interest) and MYR1.63bn for SK310 (30% working interest),  tobe  partly  funded  by  the  MYR16.5bn  restructured  loan.  The  USD124m T&I  contract  is  within  our  assumptions,  and  contributes  3-5%  of  our revenue for FY14F-FY16F. We retain our forecasts for now.

Maintain  BUY,  SOP-based  FV  of  MYR5.33 (18x  FY16F  P/E)  vs  our O&G  big-cap  valuations  of  14x-29x. We  like  the  stock  as it  unlocks its long -term value, as its status  as a  leading local player  on E&P  and  risk service contracts (RSC), and a regional champion to expand globally.

Source: RHB