This article first appeared in The Edge Financial Daily on June 14, 2018 - June 20, 2018

Sapura Energy Bhd
(June 13, 64.5 sen)
Maintain buy with an unchanged fair value (FV) of RM1: Sapura Energy Bhd and its partners Sarawak Shell Bhd and Petronas Carigali Sdn Bhd have made its ninth gas discovery off Sarawak in the Pepulut-1 exploration well, which encountered a high-quality reservoir, following the completion of its 2017 drilling campaign within the SK408 production sharing contract (PSC). Sapura Exploration and Production (Sarawak) Inc (Sapura E&P) is the development and production operator with a 40% working interest in the SK408 development.

The estimated reserve for Pepulut has not been revealed yet. Even so, pending the signing of a gas sales agreement with Petronas, which underpins project feasibility, any estimate is likely to be categorised as 2C, not 2P at this juncture.

Given that this field is in the vicinity of the Gorek, Larak and Bakong fields of phase 1 in the SK408 PSC, which achieved final investment decision in April 2018, we expect this discovery to further enhance the viability of this project cluster by leveraging on the common infrastructure, pipelines and facilities.

As the first three fields will be developed as three separate well-head platforms tied back to the existing processing facility and to the Malaysia Liquefied Natural Gas complex in Bintulu, we expect Sapura’s fabrication yard utilisation to improve significantly towards the end of the year. The group already secured two Hess Exploration and Production Malaysia BV well-head platforms and the Pegaga central processing platform from Mubadala Petroleum.

Sapura E&P’s financial year 2020 (FY20) forecast production is expected to fall by 12% year-on-year from natural decline. However, the Gorek, Larak and Bakong gas fields in the US$200 million phase 1 of the SK408 PSC are targeted to commence production in FY21, radically transforming annual gas output from two million barrels of oil equivalent (boe) by 10 times to 12 million boe and propel overall hydrocarbon production to 13.4 million boe, up 3.8 times from 3.5 million in FY18.

The fields under the SK408 gas field development project, which have an estimated reserve of 2.8 trillion cu ft of gas, are part of the discoveries made by Sapura E&P in its 2014 drilling campaign. The SK408 gas fields will be Sapura E&P’s second major upstream gas development project in Sabah and Sarawak, after the successful development and commencement of production from the group’s 30%-owned SK310 B15 gas field late last year.

With crude oil prices now trading above US$75 (RM300) per barrel, the limelight has returned to Sapura’s E&P operation, with its proposed listing becoming much more likely, reinvigorating the group’s overall rerating process. Hence, we believe that the stock is trading at an unjustified 0.2 times of our sum-of-parts of RM2.76 and 0.4 times book value (versus 0.9 times for Bumi Armada Bhd). — AmInvestment Bank, June 12.