OIL & GAS SAPURAKENCANA PETROLEUM - Welcome … · OIL & GAS SAPURAKENCANA PETROLEUM (SAKP MK) 22 January 2013 Almost a tie in bid for new Petrobras PLSV ... prospective Petrobras

OIL & GAS

SAPURAKENCANA PETROLEUM (SAKP MK) 22 January 2013

Almost a tie in bid for new Petrobras PLSV charters

Company report BUY

Alex Goh

[email protected]

+603 2036 2291

(Maintained)

Rationale for report: Company Update

Price RM2.87

Fair Value RM3.70

52-week High/Low RM3.15/RM1.94

Key Changes

Fair value Unchanged

EPS Unchanged

YE to Jan FY12 FY13F FY14F FY15F

Revenue (RMmil) 4,672.6 4,946.0 7,516.7 8,581.3

Core net profit (RMmil) 454.5 564.6 970.2 1,227.4

EPS (Sen) 9.1 11.3 16.2 20.5

EPS growth (%) 47.5 24.2 44.0 26.5

Consensus net profit (RMmil) 567.1 766.2 918.5

DPS (Sen) 0.0 0.0 0.8 1.0

PE (x) 31.6 25.4 17.7 14.0

EV/EBITDA (x) 5.4 4.8 4.3 3.9

Div yield (%) - - 0.3 0.4

ROE (%) 8.8 8.9 12.9 n/a

Net Gearing (%) 46.6 62.7 86.8 88.7

Stock and Financial Data

Shares Outstanding (million) 5,004.3

Market Cap (RMmil) 14,362.3

Book value (RM/share) 1.02

P/BV (x) 2.8

ROE (%) 8.8

Net Gearing (%) 46.6

Major Shareholders Sapura Holdings (20.0%)

Khasera Baru (19.9%)

Free Float (%) 48.0

Avg Daily Volume (mil) 12.4

Price performance 3mth 6mth 12mth

Absolute (%) +35.8 +43.2 -

Relative (%) +32.6 +37.6 -

981

1,181

1,380

1,580

1,779

0.00

1.00

2.00

3.00

4.00

May-12

Nov-12

Index Points

(RM)

Sapura-Kencana FBM KLCI

Investment Highlights

• We maintain our BUY recommendation on SapuraKencana

Petroleum (SapuraKencana), with an unchanged fair value of

RM3.70/share – based on an FY14F PE of 22x, which is the 2007 peak achieved by Kencana Petroleum.

• Upstream reported that Seadrill-SapuraKencana and Technip-NorSkan are racing neck-and-neck to secure the next batch of 6-7 pipe-lay flexible support vessel (PLSV) charters, potentially

worth over US$5bil, earmarked to work in the Brazilian pre-salt play.

• For the initial 6 vessels, Petrobras may split three contracts each between Seadrill-Sapura and Technip-NorSkan, likely picking two vessels from each category in the tender. While a

seventh PLSV may be awarded to Subsea 7 if Petrobras opts to diversify the risk, Seadrill-SapuraKencana and Technip-

Norskan are seen to be best-placed to secure the bulk of the fresh charters.

• In our view, Seadrill-SapuraKencana appears likely to get at

least three of the PLSVs, given that Petrobras may need to diversify contracting risks to more players.

• As indicated in our report early this month, we estimate that SapuraKencana’s net gearing of 1.2x immediately upon the US$2.9bil acquisition of Searill’s tender rigs next month could

moderate to 90% by end-FY14F. This assumes that the proposed placement exercise leads to 969mil new

SapuraKencana shares at RM3.00/share.

• While the group’s capex pipeline of US$1.4bil (including 2 derrick-lay vessels, 3 flexible pipe-lay support vessels for

Petrobras and 2 more tender rigs) remains sizeable, we note that US$500mil from the 50%-owned PLSV will be funded

largely off-balance sheet.

• Assuming that SapuraKencana secures the 3 new PLSVs, which we understand could cost around US$300mil each, the

group’s forward net gearing is unlikely to rise significantly above 1x given the group’s net profit of RM1.2bil-RM1.3bil

annually. Note that the group’s equity contribution for the new PLSVs may amount to only RM90mil assuming a 20:80 debt-to-equity financing for the 50:50 JV with Seadrill.

• Hence, we maintain our view that another equity-raising exercise may not the required over the next 1-2 years

following the current placement proposal. We also maintain FY13F-FY15F net profits as any contributions from the prospective Petrobras PLSVs are likely to come in beyond FY15F.

• SapuraKencana’s valuations are currently attractive at an

FY14F PE of 18x, which is at an 18% discount to Kencana Petroleum’s peak in 2007.

PP 12247/06/2013 (032380)

SapuraKencana Petroleum 22 January 2013

AmResearch Sdn Bhd 2

GROWTH PROSPECTS UNABATED

� Maintain BUY call

We maintain our BUY recommendation on SapuraKencana Petroleum (SapuraKencana), with an unchanged fair value of RM3.70/share – based on an FY14F PE of 22x, which is the 2007 peak achieved by Kencana Petroleum.

SapuraKencana’s valuations are currently attractive at an FY14F PE of 18x, which is at a 18% discount to Kencana Petroleum’s peak in 2007.

� Almost a tie for fresh Petrobras PLSVs

Upstream reported that Seadrill-SapuraKencana and Technip-NorSkan are racing neck-and-neck to secure the next batch of 6-7 pipe-lay flexible support vessel (PLSV) charters, potentially worth over US$5bil, earmarked to work in the Brazilian pre-salt play.

For the initial 6 vessels, Petrobras may split three contracts each between Seadrill-Sapura and Technip-NorSkan, likely picking two vessels from each category in the tender. While a seventh PLSV may be awarded to Subsea 7 if Petrobras opts to diversify the risk, Seadrill-SapuraKencana and Technip-Norskan are seen to be best-placed to secure the bulk of the fresh charters.

Recall that the Seadrill-SapuraKencana joint-venture is already contracted to provide three PLSVs with charters worth US$1.4bil (RM4.2bil) to work in Petrobras’ pre-salt fields by 2014-2015.

� Neck-to-neck with Technip-Norskan

Upstream reported that bids for the new PLSVs are so close that who exactly will get what is yet to be decided. Sapura Navegacao – a 50:50 joint venture between Seadrill and SapuraKencana – has proposed the construction of a 300-tonne PLSV in Brazil for a day rate of US$323,000, slightly below Technip-NorSkan’s bid of US$325,000. Both offers are for vessels to operate for Petrobras for eight years, suggesting each bid alone may be worth over US$900mil.

Petrobras also received bids for Brazilian-built units featuring 550-tonne tension capacities with Technip-NorSkan’s day rate bid of US$367,000, edging out Sapura-Seadrill’s US$370,000.

For the same 550-tonne category with construction abroad, prices came in much lower. Sapura proposed the construction of two PLSVs for day rates of US$295,000 for eight years each, and one PLSV for US$300,000 for a five-year contract. Subsea 7 finished in second place, offering two PLSVs for US$302,000 each, and one unit for a day rate of US$305,000 for eight-year periods.

Given the huge price difference of around US$70,000 in the day rate for a 550-tonne PLSV to be built in Brazil and

abroad, Petrobras may opt to have all these vessels constructed internationally.

Both proposals are also for eight-year contracts, indicating that the value could rise over US$1bil for each vessel. It appears unlikely that Petrobras will assume the cost of having the two units built in Brazil for this category of PLSVs.

� Razor-thin difference on bids

For the bid for the larger 650-tonne PLSVs, Technip-NorSkan bid for one vessel for with a day rate charter of US$309,000, finishing slightly ahead of Sapura’s day rate of US$310,000 for a single unit.

However, if two such vessels were chosen, Sapura’s bid was the best with a pair of PLSVs for US$310,000 each, while Technip-NorSkan bid two vessels for US$315,000 each. Based on eight-year contracts, the total value of the charters amounts to US$900 mil per vessel.

Sapura also proposed the construction of a single 650-tonne unit for US$315,000 for five years. Hence, if the Petrobras chooses to charter just one 650-tonne PLSV, Technip-NorSkan will be the winner, but if two PLSVs were taken, the bidding rules determine that negotiations will take place with Seadrill-Sapura.

� Further negotiations with Petrobras likely

The tender process has picked up pace more than two months after technical and commercial bids were submitted, with Petrobras having opened prices within the past week. Further negotiations with the Brazilian state-controlled giant are seen as key to determining who will get what.

Petrobras is seeking new-build PLSVs with different tension capacities, and has divided the tender into several packages, with charters on offer for five or eight-year periods, also giving players the option to build some vessels locally and others abroad.

While this appears to be a technical tie, some key factors such as the type of fuel proposed and local content thresholds, currently set at a minimum of 41%, may affect the results of the tender.

� Likely to secure three of the new PLSVs

In our view, Seadrill-SapuraKencana appears likely to get at least three of the PLSVs, given that Petrobras may need to diversify contracting risks to more players.

Characterised by their high pipe-lay tension capacities, the 550-tonne and 650-tonne PLSVs will be employed mainly to -install umbilicals, flexible flowlines and risers to connect subsea wells to floating production, storage and offloading vessels in the ultra-deep water portion of the Santos basin.



The first delivery for the vessels is scheduled for about 42 months after contract signing. If awarded multiple contracts, each subsequent vessel will be delivered within an interval of six months.

� Net gearing of 1.2x could moderate below 1x

As mentioned in our report early this month, we estimate that SapuraKencana’s net gearing of 1.2x immediately upon the US$2.9bil acquisition of Searill’s tender rigs next month could moderate to 90% by end-FY14F. This assumes that the proposed placement exercise leads to 969mil new SapuraKencana shares at RM3.00/share.

While the group’s capex pipeline of US$1.4bil (including 2 derrick-lay vessels, 3 flexible pipe-lay support vessels and 2 more tender rigs) remains sizeable, we note that US$500mil from the 50%-owned PLSV will be funded largely off-balance sheet.

Assuming that SapuraKencana secures 3 new PLSVs, which we understand could cost around US$300mil each, we do not expect the group’s forward net gearing to rise significantly above 1x given the group’s net profit of RM1.2bil-RM1.3bil annually. Note that the group’s equity contribution for the new PLSVs may amount to only RM90mil assuming a 20:80 debt-to-equity financing for the 50:50 JV with Seadrill.

Hence, we maintain our view that another equity-raising exercise may not the required over the next 1-2 years following the current placement proposal. We also maintain FY13F-FY15F net profits as any contributions from the prospective Petrobras PLSVs are likely to come in beyond FY15F.

PICTURE 1 : KM 1 TENDER-ASSISTED RIG

Source: SapuraKencana



TABLE 1 : INDUSTRY VALUATIONS

Market ROE

Stocks capitalisation CY13F CY14F CY13F CY14F FY13F P/BV

RMmil x x % % % x

Alam Maritim Resources 645 9.1 8.5 1.7 1.9 11.5 1.3

Boustead Heav y Industries 547 11.5 4.0 3.0 3.0 13.0 1.5

Bumi Armada 11,128 19.2 17.1 0.8 0.9 13.7 3.0

Dialog Group 5,702 20.9 16.9 1.3 1.3 17.6 4.4

KNM Group 496 13.6 10.6 2.0 2.5 4.2 0.3

MMHE 7,024 19.2 17.3 1.0 1.8 7.8 2.9

Petronas Gas 36,606 21.5 19.0 3.2 3.4 17.8 4.1

SapuraKencana Petroleum 14,362 18.1 14.2 0.3 0.4 12.9 2.3

Wah Seong Corporation 1,249 11.7 10.5 4.7 5.3 9.8 1.3

Average 16.1 13.1 2.0 2.3 12.0 2.4

Average of fabricators 16.7 12.6 0.8 1.3 13.0 3.8

Larger cap stocks (over RM1bil) 18.1 15.8 1.1 1.5 14.0 3.6

PE Div yield

Source: AmResearch



TABLE 2 : FINANCIAL DATA

Income Statement (RMmil, YE 31 Jan) 2011 2012 2013F 2014F 2015F

Revenue 4,347.1 4,672.6 4,946.0 7,516.7 8,581.3

EBITDA 662.6 770.6 1,105.1 2,369.1 2,730.4

Depreciation (116.0) (123.9) (192.8) (670.4) (704.4)

Operating income (EBIT) 546.6 646.6 912.3 1,699 2,026.0

Other income & associates 45.9 102.7 146.1 197.3 230.1

Net interest (56.7) (61.3) (115.2) (475.9) (539.8)

Exceptional items 0.0 0.0 (88.8) 0.0 0.0

Pretax profit 535.8 688.1 854.4 1,420.0 1,716.3

Taxation (64.4) (90.4) (129.3) (178.7) (201.6)

Minorities/pref dividends (163.3) (143.1) (249.4) (271.1) (287.3)

Net profit 308.2 454.5 475.8 970.2 1,227.4

Core net profit 308.2 454.5 564.6 970.2 1,227.4

Balance Sheet (RMmil, YE 31 Jan) 2011 2012 2013F 2014F 2015F

Fixed assets 2,523.2 2,797.1 4,714.7 13,540.0 14,546.4

Intangible assets 4,818.7 4,911.8 4,666.2 4,432.9 4,211.2

Other long-term assets 242.8 277.8 390.1 540.7 716.2

Total non-current assets 7,584.7 7,986.7 9,771.0 18,513.6 19,473.8

Cash & equivalent 2,104.7 2,111.0 2,204.1 2,588.4 2,721.1

Stock 79.5 88.3 81.3 123.6 141.1

Trade debtors 1,863.4 1,927.1 1,964.8 2,986.1 3,409.0

Other current assets 48.0 48.0 50.4 52.9 55.5

Total current assets 4,095.5 4,174.3 4,300.6 5,750.9 6,326.7

Trade creditors 1,985.1 2,140.2 2,100.3 3,192.0 3,644.1

Short-term borrowings 749.0 1,065.9 1,172.5 1,231.1 1,292.7

Other current liabilities 18.3 18.4 24.0 31.2 34.7

Total current liabilities 2,752.4 3,224.6 3,296.8 4,454.3 4,971.5

Long-term borrowings 3,378.6 3,433.0 4,543.5 9,510.5 9,986.1

Other long-term liabilities 54.0 54.0 56.7 59.6 62.5

Total long-term liabilities 3,432.6 3,487.1 4,600.3 9,570.1 10,048.6

Shareholders’ funds 5,169.0 5,121.1 5,596.9 9,391.5 9,644.5

Minority interests 326.2 328.2 577.6 848.6 1,136.0

BV/share (RM) 1.03 1.02 1.12 1.57 1.61

Cash Flow (RMmil, YE 31 Jan) 2011 2012 2013F 2014F 2015F

Pretax profit 535.8 688.1 854.4 1,420.0 1,716.3

Depreciation 116.0 123.9 192.8 670.4 704.4

Net change in working capital 0.0 82.7 (67.5) 32.9 12.5

Others 10.7 (698.6) (149.8) 361.2 875.6

Cash flow from operations 662.6 196.2 830.0 2,484.5 3,308.9

Capital expenditure 0.0 (500.0) (1,838.7) (15,105.4) (3,112.2)

Net investments & sale of fixed assets 0.0 0.0 0.0 0.0 0.0

Others 0.0 0.0 0.0 0.0 0.0

Cash flow from investing 0.0 (500.0) (1,838.7) (15,105.4) (3,112.2)

Debt raised/(repaid) 0.0 (3.0) (2.0) (1.0) 0.0

Equity raised/(repaid) 0.0 (3.0) (2.0) 967.9 0.0

Dividends paid 0.0 0.0 0.0 (48.5) (61.4)

Others 0.0 41.5 30.9 (278.7) (309.6)

Cash flow from financing 0.0 35.5 26.9 639.8 (371.0)

Net cash flow 662.6 (268.4) (981.8) (11,981.2) (174.2)

Net cash/(debt) b/f 662.6 (265.4) (979.8) (11,980.2) (174.2)

Net cash/(debt) c/f (2,022.8) (2,388.0) (3,511.9) (8,153.3) (8,557.6)

Key Ratios (YE 31 Jan) 2011 2012 2013F 2014F 2015F

Revenue growth (%) n/a 7.5 5.8 52.0 14.2

EBITDA growth (%) n/a 16.3 43.4 114.4 15.3

Pretax margins (%) 12.3 14.7 17.3 18.9 n/a

Net profit margins (%) 7.1 9.7 9.6 12.9 n/a

Interest cover (x) 9.6 10.6 7.9 3.6 n/a

Effective tax rate (%) 12.0 13.1 15.1 12.6 11.7

Net dividend payout (%) 0.0 0.0 0.0 5.0 n/a

Debtors turnover (days) 78 148 144 120 n/a

Stock turnover (days) 3 7 6 5 n/a

Creditors turnover (days) 83 161 156 128 n/a

Source: Company, AmResearch estimates



CHART 1 : GEOGRAPHICAL BREAKDOWN OF ORDER BOOK (RM18BIL)

Malaysia35%

Brazil & Gulf of Mexico24%

Australia12%

South East Asia14%

Others1%

Source: AmResearch

CHART 2 : ORDER BOOK BREAKDOWN (RM18BIL)

EPCIC65%

Drilling 30%

Marine Services4%

O&M1%

Source: AmResearch



TABLE 3 : UPCOMING OIL & GAS PROJECTS

EPCIC jobs Location Scope of works RMmil Likely bidders

Upstream

Ex x on-Mobil's enhanced oil recovery Rejuv enation of Tapis, Telok, Seligi,

Guntong, Semangkok, Irong Barat, Tabu

and Palas oilfiields off Peninsula, Sabah

& Sarawak.

Central processing platforms, gas

compression sy stems, process equipment,

MOPU, tender rigs, offshore vessels.

10,000 MMHE, SapuraKencana, Wah

Seong, Bumi Armada, Alam

Maritim

Carigali-Hess' North Malay gas project- fast

track basis

North Malay basin (Blocks PM301 and

PM302), near JDA

Central processing plafform, 8 w ell head

platforms, 200km pipeline



Maritim

Shell's deepwater Malikai project Malikai field, off Sabah Fabrication of tension leg platform,

installation of pipelines and facilities



Maritim

Petrronas Carigali's EOR projects Dulang, Semarang, Bokor 3 Central Processing Platforms for

enhanced oil recov ery .



Maritim

Petronas' 1mil tonne FLNG Kimanis gas field 1st floating liquiefied natural gas carrier 6,000 Technip-Daewoo, MMHE

Murphy Oil, 1.5mil tonne FLNG Rotan, off Sabah 2nd floating liquiefied natural gas carrier 9,000 JGC Corp, Toy o Engineering

Shell Malay sia's EOR projects Baram Delta, off Sarawak and North

Sabah

Enhanced oil recov ery proejcts 38,000 MMHE, SapuraKencana, Wah


Maritim

25 marginal field projects Peninsula, Sabah & Sarawak New risk-sharing contract from Petronas. 52,500 SapuraKencana,Dialog Group,

Petra Energy , Scomi Marine,

Puncak Niaga, UMW Oil & Gas,

Bumi Armada

Petronas' umbrella tender for shallow w ater

jobs

Peninsula, Sabah & Sarawak 5-y ear Hook-up & Commissioning,

maintenance contracts.

10,000 SapuraKencana, Day ang, Alam

Maritim, Perdana Petroleum

Downstream

Petronas' Refinery & Petrochemical Integrated

Dev elopment and other mutlinationals

Pengerang, Johor Refinery , petrochemical projects 120,000 Dialog, SapuraKencana,

Muhibbah Engineering, Ranhill,

KNM

Tank Terminal Projects Southern Johor- Pengerang, Tanjung Bin,

Tanjung Langsat

Tank terminals for crude oil,

petrochemicals, LNG.

10,000 Dialog, MMC, Benalec,

Muhibbah Engineering, Ranhill

LNG Regassification plants Malacca, Lahad Datu, Pengerang, Lumut LNG Regassification plants 12,000 Dialog, Muhibbah Engineering,

Ranhill

Malay sia LNG Train 9 Bintulu, Sarawak 3.6 mil tonne increase to MLNG's

liquefaction facilities

10,000 JGC Corporation, Chiy oda-

Saipem

Petronas' Samur ammonia/urea plant Sipitang, Sabah Fertilizer plant 4,500 Muhibbah Engineering, Ranhill

Total 308,000

Source: AmResearch



TABLE 4 : TENDER RIGS ACQUIRED FROM SEADRILL

Source: Seadrill



Published by

AmResearch Sdn Bhd (335015-P) (A member of the AmInvestment Bank Group) 15 t h F l oo r B a ng un an A mB a n k Gr o u p 55 Jalan Raja Chulan 50200 Kuala Lumpur Tel: ( 03 ) 2 07 0- 2 4 4 4 ( r e sea rc h ) F a x: ( 03 ) 2 07 8- 3 1 6 2

Printed by

AmResearch Sdn Bhd (335015-P) (A member of the AmInvestment Bank Group) 15 t h F l oo r B a ng un an A mB a n k Gr o u p 55 Jalan Raja Chulan 50200 Kuala Lumpur Tel: ( 03 ) 2 07 0- 2 4 4 4 ( r e sea rc h ) F a x: ( 03 ) 2 07 8- 3 1 6 2

The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice.

For AmResearch Sdn Bhd

Benny Chew Managing Director

OIL & GAS SAPURAKENCANA PETROLEUM - Welcome … · OIL & GAS SAPURAKENCANA PETROLEUM (SAKP MK) 22 January 2013 Almost a tie in bid for new Petrobras PLSV ... prospective Petrobras

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