This article first appeared in The Edge Financial Daily on April 20, 2018

Sapura Energy Bhd
(April 19, 79 sen)
Maintain buy with a fair value (FV) of RM1: Our “buy” recommendation is maintained on Sapura Energy Bhd with unchanged forecasts and a fair value of RM1 per share, based on a 50% discount to financial year 2019 (FY19) forecast book value. Currently, the drilling division’s utilisation is below break-even at 33% while the engineering and construction segment will only begin to be profitable next year from the newly secured Pegaga central processing platform and additional three well head platform jobs. However, with crude oil prices now trading above US$70 (RM272.30) per barrel, the limelight has returned to Sapura’s exploration and production (E&P) operations, with its proposed listing becoming much more likely and reinvigorates the group’s overall rerating process.

The group’s commencement of 100 million cu ft per day gas production from the SK310 B15 development in October last year is expected to generate earnings before interest, taxes, depreciation and amortisation of US$25 million assuming oil price of US$65 per barrel, which will more than offset the natural decline of Sapura’s oil producing assets, raising production by 23% year-on-year (y-o-y) to 4.3 million barrels of oil equivalent (BOE) in FY19.

E&P’s FY20 production is expected to fall by 12% y-o-y from natural decline. Subsequently, the Gorek, Larak, and Bakong gas fields in the US$200 million phase one of the SK408 production sharing contract are targeted to commence production in FY21, radically transforming annual gas output from two million BOE by 10 times to 12 million BOE and propel overall hydrocarbon production to 13.4 million BOE, up 3.8 times from 3.5 million in FY18. While final investment decision for phase two for the Jerun field in SK408 has not been reached, its commencement in FY24 is expected to boost the group’s overall production even further to 20 million BOE, 5.7 times current output.

Sapura is also actively exploring E&P prospects overseas, which include its 30% stake Block 30 in the Sureste Basin and Blocks 11 and 13 in the Burgos Basin, Gulf of Mexico together with farm-in agreements to five offshore exploration permits in Taranaki Basin, New Zealand.

Currently, 95% of E&P’s wholly local net reserve of 253 million BOE is based on gas fields off Sarawak with the balance oil off Terengganu. Assuming Brent crude oil price of US$65 per barrel, oil production cost (including royalties and petroleum taxes) of US$55 per barrel, gas price of US$3.25 per million British thermal units (mmbtu) and gas production cost of US$1.50 per mmbtu, our revised E&P asset value of US$2 billion is 56% above the segment’s FY17 net asset of RM5 billion. This translates into sum-of-parts (SOP) of RM2.76 per share, which is 73% above book value and 3.8 times above the current share price. Even though the share price has rebounded by 80% from the all-time low of 41 sen in mid March this year, there is still ample upside to further raise our FV given that the stock is currently trading at a huge 73% discount to our SOP. — AmInvestment Bank, April 19