SapuraKencana Petroleum - 4Q13 Analyst Briefing Key Updates

We were at SapuraKencana’s (“SKPETRO”) well-attended 4QFY13 analyst briefing last week. The key takeaways were: 1) the main reasons for the lower margins in FY13 vs. FY12; 2) details on its Berantai field contribution; 3) an update on the Seadrill tender-rig acquisition; and 4) further details on its upcoming Brazil Pipe-Lay Support Vessel (PLSV) prospect. Overall, management was satisfied by its own progress post the merger between Sapuracrest and Kencana and is looking forward to the potential benefits from the upcoming Seadrill tender rig acquisition. We are maintaining our net profit forecast of RM744.2m for now pending the completion of the acquisition, which will lead to higher earnings, debts and the number of shares. We will also introduce our FY15 net profit after the acquisition. We continue to like SKPETRO for its: 1) extensive service provisions, which span from drilling to the EPCIC value chain; 2) domestic market dominance and 3) increasing exposure to the international markets. We maintain our OUTPERFORM call on the stock and our target price of RM3.82 based on a CY13 PER of 26.5x. Recall, our target price of RM3.82 is based on 20x on implied CY13 of 19sen to accommodate the potential earnings accretion from the new rigs of SKPETRO post its acquisition exercise with Seadrill.

SKPETRO's margin was affected by the timing of recognition, one-off merger costs, Seadrill acquisition ongoing costs and higher borrowings. Management guided that the lower YTD PBT margin (12.0% versus 12.4% in FY12), which fell despite the increase in revenue, was mainly due to: (i) timing issues (where SKPETRO could only recognise eight months of Kencana's earnings due to the merger accounting method) and (ii) also due to other higher costs incurred i.e. the one-off Sapuracrest and Kencana merger cost (RM54m recognised in 4QFY13), the Seadrill acquisition cost of RM46m and a higher borrowings cost in the year given its aggressive newbuilding scheme. The merger cost should not recur in FY14. However, there will continue to be some Seadrill acquisition costs given that the exercise is not completed as yet.

Berantai made maiden contribution in 4QFY13. We understand that the Berantai field made its maiden contribution in 4QFY13 after having achieved its first-gas in Oct-12, which also drove the higher EJV division’s revenue/profit in 4QFY13. Management has guided for a full year contribution from FY14 onwards.

Updates on the Seadrill tender-rig acquisition. Management hopes to conclude the acquisition by May-CY13, which would mean a nine-month contribution for FY14. On the overall, management seemed excited about the acquisition as: 1) it foresees that the business will expand SKPETRO’s global footprint (i.e. to countries like Angola, Trinidad and Tobago) and 2) believes that the applications for the tender-rigs could expand (i.e. beyond just the shallow-water application), thus creating more opportunities for the group.

Source: Kenanga