SapuraKencana Petroleum Bhd
(Oct 20 RM3.60)
Maintain buy with a lower target price of RM5.40: We are trimming earnings from lower crude oil price assumptions. SapuraKencana’s (SAKP) earnings are largely insulated from the recent weakness in crude oil prices.

Following our downgrade of Brent crude oil price assumption to US$95 (RM310.65)/barrel from US$106/barrel previously, SAKP’s financial year (FY) 15-17 forecast earnings are trimmed by only 4-5%.

Other than the production segment, SAKP’s earnings are largely intact as these are backed by its solid orderbook.

SAKP’s RM25 billion order book is largely made up of long-term contracts including the pipe lay support vessel charters (PLSV) from Petrobras (47% of order book) and the Pan Malaysian installation contracts (20% of order book).

The drilling business is also stable (19% of order book) as are its other segments like subsea services and hook-up and commissioning. As such, excluding the production segment, SAKP’s earnings for the remainder of FY15 and even at least 60-70% of FY16 Forecast earnings are largely intact.

Current valuations ignore Newfield acquisition. With the recent sell down, SAKP’s valuations are attractive at only 14 times FY15 forecast and 13 times FY16 forecast as the stock has been trading comfortably past 20 times price-earnings ratio (PER) previously.

At the current price, it also appears that most of the value accretion from the Newfield acquisition has been wiped out, which is unjustified as it has produced assets, with potential for more via new gas discoveries.

Based on our view that weaker crude prices are here to stay; we are lowering our PE valuation target to 20 times from 22 times previously.

Together with the earnings cut and rolling over valuations to FY16 forecast, we derive a slightly lower target price of RM5.40. Maintain buy. — AllianceDBS, Oct 20

This article first appeared in The Edge Financial Daily, on October 21, 2014.