Kencana Petroleum - Secured RM74mil Tapis substructure job BUY

We maintain our BUY call on Kencana Petroleum (Kencana), with an unchanged fair value of RM3.54/share – pegged to a CY12 PE of 22x against the merged Kencana-SapuraCrest’s earnings. 

Kencana has secured its second contract this year, with a RM74mil job from ExxonMobil Exploration and Production Malaysia Inc to fabricate a Tapis R sub-structure for the Tapis ReDevelopment roject. This one-off contract, expected to be delivered in 2QCY13, involves the procurement, fabrication, testing, load-out and tie-down of sub-structures which include jacket, piles and related component which forms part of Tapis R central processing platform, off the coast of Terengganu. 

Recall that Malaysia Marine & Heavy Engineering has already secured the main bulk of the Tapis enhanced oil recovery (EOR) project with a RM1.6bil contract to procure, fabricate, test, loadout, install and commission an integrated offshore platform deck called Tapis R and two interplatform deck in November last year. Hence, we do not expect further contracts from the Tapis EOR for Kencana, which clinched a RM101mil contract from Murphy to fabricate substructures, template & other services for the Patricia & Serendah platforms, SK309 field, off Bintulu just last week.

But we expect this small job to be just the start of the group’s order book accretion, given Petronas’ spending programme of RM300bil over the next five years, which includes enhanced oil recovery and marginal field jobs. We understand that the group is expected to secure two well-head platforms for the Bunga Dahlia and Teratai fields, connected to nine fields in Blocks PM301 and PM302 and in the Bergading contract area. Hence, while Kencana’s total new orders secured to date since the start of FY12F amounts to RM1.2bil, we maintain FY12F-FY14F earnings based on annual new orders of RM1.8bil-RM2bil.

We remain positive about Kencana’s synergistic merger with SapuraCrest Petroleum, which may be completed in March-April this year. While Kencana has been expanding its yard and commenced the construction of two new tender rigs, its merger partner has been penetrating new markets recently, notably Brazil. Recall that besides SapuraCrest’s recent 50:50 JV with Seadrill to own, manage and operate three flexible pipe-lay support vessels, there could be a further injection of three semi-submersibles into the group’s fleet. 

The stock currently trades at an attractive FY13F PE of 19x, below its 2007 peak of 22x.

Source: AmeSecurities