Second RSC with Vestigo? - SKPETRO

by **Cals** Tue 27 Aug 2013, 12:16

Second RSC with Vestigo?
Business & Markets 2013
Written by Alliance Research
Tuesday, 27 August 2013 11:10

SapuraKENCANA PETROLEUM BHD []
(Aug 26, RM3.51)
Maintain strong buy at RM3.58 with a target price of RM5.28: It was reported in The Edge weekly that SapuraKencana had entered into a partnership with Petronas Carigali Sdn Bhd-owned Vestigo Petroleum Sdn Bhd to supposedly pave the way for it to land a second risk service contract (RSC).

According to sources, SapuraKencana has signed a heads of agreement with Vestigo to bid for the development and production of the Bubu marginal oilfield that is located off the coast of Terengganu.

The news is positive as an additional RSC will provide SapuraKencana with more long-term recurring income, similar to the Berantai RSC which started production in October 2012.

We look forward to more news developments on the Bubu RSC, as few details are known at this juncture. It is not yet clear whether or not the group is confirmed for the said RSC and also its role in the development. Given the likely small size, SapuraKencana will be able to fund the project internally and it is not likely to be material to earnings in the future.

Year-to-date, SapuraKencana has announced the receipt of RM9.8 billion in contracts, bringing its total order book to an estimated RM26.6 billion. We expect more jobs to materialise in the coming 12 months, including contracts for fabrication, installation as well as marginal field (like the Bubu RSC) or matured field rejuvenation contracts.

On the cards for new fabrication works, we believe, are Malaysian projects like West Sepat, North Malay Basin, Dulang, Bokor, Semarang and more.

For offshore CONSTRUCTION [] and subsea services, the group will be submitting a tender for the Pan Malaysian installation contract, as we had mentioned previously, which could be worth at least RM3 billion.

We continue to believe that SapuraKencana will be a front runner for this project, given its track record in execution for the past four years for Pan Malaysian installations.

We maintain our “strong buy” call on SapuraKencana with an unchanged target price (TP) of RM5.28. Our TP is based on 2015 financial year (FY15) earnings per share of 26.4 sen pegging an industry peak cycle price-earnings ratio of 20 times.

We view the recent share price weakness a good opportunity to buy into the stock. Upside potential to our TP is significant at some 48%. We continue to expect strong earnings growth ahead for the group with a three-year compound annual growth rate of 29.8% underpinned by contributions from Seadrill Ltd’s tender rigs, and the first Petrobras SA contract from late FY15 onwards. — Alliance Research, Aug 26

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This article first appeared in The Edge Financial Daily, on August 27, 2013.