This article first appeared in The Edge Financial Daily, on September 29, 2015.

SapuraKencana Petroleum Bhd
(Sept 28, RM1.91)
Maintain buy call with an unchanged target price (TP) of RM2.15: Our TP of RM2.15 is based on a sum-of-parts methodology. 

The group’s upstream services businesses are valued at a 13 times price-earnings ratio while the production business including gas assets are valued on a discounted cash flow business. 

SapuraKencana’s latest order book stands at RM23 billion, to last the group well into the year 2020 due to long-term fixed contracts. 

Order book provides near-term visibility as well with RM5 billion for financial year ending Jan 31, 2016 (FY16) recognition and RM5 billion for FY17. 

The RM12 billion of the total order book is for the supply and operation of six pipelay support vessels to Petróleo Brasileiro SA for five to eight years. 

SapuraKencana continues to secure work despite the challenging market with RM2.7 billion won since December 2014. 

We expect up to RM4 billion to RM6 billion of additional order replenishments over the next 12 months. Current tender book stands at RM15 billion. 

With a net production of about 16,000 barrels of oil equivalent per day (boed), SapuraKencana is hungry for more. Already, the group is working towards monetising a three trillion cu ft gas discovery made last year, which we view as being worth RM4.3 billion and could provide a recurring income for up to 30 years. 

SapuraKencana is also in the midst of acquiring blocks in Vietnam (net production estimate of 11,000 boed) and a huge production sharing contract for a greenfield block in Sabah. Assuming completion by FY17, the Vietnam acquisition could boost FY18 earnings by 15%. 

For every US$5 (RM22) per barrel increase in crude oil price, we estimate about 7% earnings growth for SapuraKencana. If crude oil prices see prolonged weakness into FY17 to FY18, there would be downside to earnings. 

Furthermore, overall contracting activity in the market will continue to be weak and could result in increased idle time for core assets like derrick lay vessels and tender. — AllianceDBS Research, Sept 28