This article first appeared in The Edge Financial Daily on May 11, 2017 - May 17, 2017

Sapura Energy Bhd
(May 9, RM1.90)
Maintain buy call with an unchanged target price of RM2.30: The oil and gas (O&G) sector has bottomed and this year is expected to be its inflexion point. Industry sentiment has improved on the back of firmer oil prices year-to-date. However, the stronger tender pipeline will only be realised in financial year 2019 (FY19) (overall bids and prospects stood at US$7 billion [RM30.38 billion]). For that, Sapura Energy Bhd has reiterated its view that FY18 will remain tough. Sustaining order replenishment and containing cost remain key. Of its RM16.7 billion order backlog from end-FY17, 33% will be recognised in FY18, and another 19% in FY19.

Sapura Energy’s cost-cutting exercises are almost at the tail end, and it is rebasing its cost at the US$45 per barrel level. Optimally, we understand there is a likelihood of cutting its cost by another RM200 million.

In the drilling space, the company expects to sustain a 50% utilisation level in FY18 (unchanged year-on-year). Daily charter rates (DCRs) have stabilised and are likely to be unchanged over the next two years. DCRs for barge rigs stood at US$70,000 to US$90,000, and US$120,000 to US$150,000 for semi-tender rigs. Sapura Energy has delayed the delivery of its new-build rig, Kinabalu, to 2021.

Sapura Energy’s net reserves and resources stood at 243 million barrels of oil equivalents at end-January 2017. It has committed to drill seven infield wells at its PM323 oilfield in FY18. The break-even of its earnings before interest, taxes, depreciation and amortisation for its producing oilfields is at the level of between US$30 and US$35 per barrel.

Elsewhere, the SK310 B15 gas field development is on track, with first gas expected in the fourth quarter of FY18. Sapura Energy is also in progress to monetise the SK408 (Gorek & Larak) field. On the exploration side, it plans for: i) two exploration commitment wells for SK408 in FY18; and ii) initiation of seismic acquisition of the SB331/332 fields in FY18. Its long-term target is to achieve US$500 million per year in cash flow by 2023.

Sapura Energy expects FY18 to remain challenging, but is increasingly positive on FY19. Monetisation of its gas assets is a catalyst not fully priced in yet. All in, we see the group as a direct proxy and beta play for a recovering O&G sector outlook. — Maybank IB Research, May 8