This article first appeared in The Edge Financial Daily on April 13, 2018
Sapura Energy Bhd
(April 12, 68.5 sen)
Maintain buy with a higher target price (TP) of 84 sen: We are positive on the formalisation of SK408 Phase 1’s final investment decision and gas sales agreement (GSA), although this has been well flagged to the market. Similar to Sapura Energy Bhd’s maiden field development project (SK310 B15), we do not expect project details to be unveiled for this new project, given high levels of secrecy surrounding Petronas production sharing contract contracts.
However, assuming a two-year development plan, we can expect earnings contribution from this project to begin from financial year 2021 (FY21). This is in line with management’s target of first gas for SK408 Phase 1 in 2019 to 2020.
Management had earlier provided guidance that SK408 Phase 1 will incur a net development capital expenditure (capex) of US$200 million (RM776 million) from 2018 to 2020. Additionally, similar to the previous year, Sapura Energy will not increase borrowings in FY19, and shall finance the exploration and production (E&P) capex (FY18: RM890 million) internally.
We believe this is viable as Sapura Energy’s near-term liquidity and balance sheet (net gearing: 1.6 times) remain manageable, underpinned by healthy operating cash flows (FY18: RM1 billion; FY17: RM3.1 billion). Furthermore, FY19 cash flows are expected to receive a significant boost from SK310 B15, which started production recently in October 2017.
We believe the timing of this project hits a sweet spot, as it capitalises on the current low cost environment in upstream development. Meanwhile, fast forward two years later, and this project will benefit from the recovery in oil price.
Furthermore, Sapura Energy’s engineering and construction (E&C) fleet is currently underutilised. Therefore, development of Phase 1 SK408 may provide working opportunities to boost Sapura Energy’s E&C order book.
We are positive on Sapura Energy’s active momentum in the upstream E&P space in recent months, thus enabling the group to capitalise on oil price’s nascent recovery. This includes farm-in agreements to five offshore exploration permits within the Taranaki Basin at New Zealand, and the award of Block 30 in Sureste Basin in the Gulf of Mexico.
In light of the group’s positive traction in the E&P space, we tweak our valuation of Sapura Energy’s adjusted book value (BV) per share by lowering discounts on: i) goodwill: 10% (previous: 30%); and ii) trade receivables: 10% (previous: 20%). As a result, our 2018 adjusted BV per share is raised to RM1.40 (previous: RM1.09) based on 2018 BV, net of the above items and other intangible assets.
Sapura Energy’s E&P assets have high monetisation potential, and renders the stock a proxy to oil price recovery. To recap, Sapura Energy has oil and gas net reserves and resources totalling 253 million barrels of oil equivalent. SK310 B15, which recently commenced production in October 2017, is set to deliver maiden profits in the first quarter of FY19. Meanwhile, earnings before interest, taxes, depreciation and amortisation oil break-even price for PM323 remains low at US$30 to US$35 per barrel. Both fields generate immediate cash flow to fund development capex required by Sapura Energy’s E&P assets in Malaysia, New Zealand and Mexico.
Maintain “buy” on Sapura Energy with revised a TP of 84 sen (previous: 65 sen). Aside from being an oil price recovery play, other catalysts include potential listing of Sapura Energy’s E&P assets in unlocking value and raising significant cash, and earnings upside due to substantial depreciation savings (US$40 million per year) from FY18’s major kitchen-sinking exercise. — TA Securities Research, April 12