SapuraKencana Petroleum Bhd
(March 24, RM2.30)
Maintain buy with lower target price of RM2.80 from RM3.80. We cut our financial year 2016 ending January (FY16) core earnings forecasts by 33% and by 35% for FY17.  We do not rule out SapuraKencana impairing its exploration and production (E&P) assets in its upcoming fourth quarter FY15 results due out on March 24, due to the low oil price effect. However, the impact is likely to be manageable, around RM100 million, and non-cash flow-related.

SapuraKencana will have a challenging year in FY16. Low oil price levels, production slowdown, rate cuts and provisions and impairments are some of the expected setbacks, resulting in lower year-on-year (y-o-y) earnings.  Its energy and drilling operations will face significant drag on earnings. Ex-one-offs, which would include impairments, we are forecasting 31% y-o-y lower core net profit in FY16 based on our revised estimates. Moreover, concerns over a possible share overhang and the outlook for Petróleo Brasileiro (Petrobras) and Newfield have also served to cloud fundamentals in the short term. 

We opine that the signing of a gas sales agreement, re-admittance into the syariah list and instant monetisation of its planned Vietnam E&P assets are key catalysts.

That said, we opine that downside risk to its share price is limited as the negative developments are largely priced in. SapuraKencana’s long-term prospects remain intact. 

Its order book visibility of RM19.1 billion will be sufficient to allow it to weather the subdued operating environment, impacting its financial aspects over the next two years.  Monetising its gas field assets and integrating its Vietnam E&P operations are its medium-term growth path, as this would improve its oil reserves by 107% and gas by 128%. — Maybank Investment Bank Bhd, March 24

This article first appeared in The Edge Financial Daily, on March 25, 2015.