This article first appeared in The Edge Financial Daily, on June 29, 2016.

SapuraKencana Petroleum Bhd
June 28 (RM1.42)
Maintain hold with an unchanged fair value of RM1.40: We maintain our “hold” recommendation on SapuraKencana Petroleum Bhd, with an unchanged fair value of RM1.40/share based on financial year 2017 forecast (FY17F) book value, which includes a 50% discount to the group’s intangible asset value.

Our forecasts were unchanged pending the announcement of the group’s first quarter of FY17 (1QFY17) results yesterday afternoon. As mentioned in our report on June 15, we expect the group’s 1QFY17 results to be weak due to the five rigs — T19, Berkat, Berani, Menang and Esperanza — that were stacked and seasonally weak offshore installation activities. We highlight that our FY17F net profit estimate is 72% below the street’s.

SapuraKencana’s wholly-owned SapuraKencana Energy Sarawak Inc (SKE) has signed the SK310 Upstream Gas Sales Agreement to sell gas to Petroliam Nasional Berhad (Petronas) from the B15 Gas Field from SK310 Production Sharing Contract (PSC) contractors, who are the joint sellers.

SKE is the operator of the Block SK310 PSC, which was awarded by Petronas on June 17, 2008 to NewField, which later sold its Malaysian upstream assets to SapuraKencana. Hence, SKE has a participating interest of 30%, Petronas Carigali Sdn Bhd at 40%, and Mitsubishi Corporation’s Diamond Energy Sarawak Sdn Bhd at 30%.

The B15 Gas Field within the SK310 PSC area was discovered in December 2010, and is estimated to have reserves of 0.3 billion cubic feet. Block SK310, which has three fields (B15, B14 and B17) with total estimated reserves of three trillion cubic feet, is located in water depths of between 50m and 100m in the Central Luconia Province, offshore East Malaysia.

The B15 development cost has been reduced by 24% from an earlier approved US$370 million (RM1.5 billion) to US$280 million due to optimisation of project engineering, execution and procurement. However, it will still comprise a central processing platform with a 35km gas evacuation pipeline to be tied into existing infrastructure.

Recall that the B15 Gas Field will deliver 100 MMscfd (million standard cubic feet per day) of gas for five to six years to the Malaysia Liquefied Natural Gas complex in Bintulu, Sarawak, with first gas delivery targeted for the fourth quarter of 2017.

The group has not revealed the gas pricing terms, but assuming a project internal rate of return of 20%, depreciation over seven years and a weighted average cost of capital of 8%, we estimate an incremental 11% to FY19F earnings and net present value accretion of RM160 million, or 2% of the group’s current market capitalisation. We understand that the group’s share of US$84 million in project cost has already been accounted for in its RM7 billion multi-currency sukuk programme initiated last year.

The stock currently trades at a 35% discount to book value due to its low asset utilisation, weak near-term earnings outlook dampened by low crude oil prices and high net gearing of 1.3 times. — AmInvestment Bank Research, June 28