AmWatch - SapuraKencana Petroleum : Strong rig charter rate in Congo BUY, 2 Apr 2014

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SapuraKencana Petroleum : Strong rig charter rate in Congo        BUY

We maintain our BUY recommendation on SapuraKencana Petroleum Bhd, with an unchanged fair value of RM5.70/share, based on an FY15 PE of 22x. SapuraKencana has secured a significantly higher daily charter rate of US$296k for its semi-tender assisted rig SKD Berani from Total in Congo at a value of US$108mil for a 1-year contract which excludes an option to extend for another year. This is 74% higher than the day rate of US$170k, which SKD Berani, built in 2006 by Seadrill, was charging Chevron in Indonesia last year. We believe this stems from strong demand for this niche rig segment in West Africa.

The group also extended the contracts for 3 other rigs involving a semi-tender rig SKD Pelaut, and 2 tender-assisted rig, SKD Setia and SKT T-12. SKD Pelaut secured an extension contract valued at US$92mil for 2 years from Brunei Shell, SKD Setia US$164mil for 2 years from Cabinda Gulf Oil Company Limited in Angola and SKD T-12 US$90mil for 2 years from Chevron Thailand. For SKD Pelaut, the new daily charter rate translates to a 5% increase to US$126k; SKD T-12’s rate increased by 3% to US$123.2k while SKD Setia’s rate was largely flat at US$224.6k.

We estimate that the higher charter rate for SKD Berani could raise SapuraKencana’s FY15F earnings by 11%. If the rig could renew its charter at the same rate, earnings will rise by 11%-12% in FY16F-FY17F. For now, we maintain FY15F-FY17F earnings as the higher rig earnings may be offset by weaker-than-expected engineering, procurement, construction, installation and commissioning works in 1HFY15F due to the slow initial roll-out of Petronas projects under the Pan-Malaysia T&I job scope. We remain positive on SapuraKencana’s prospects given the group’s game-changing US$898mil (RM2.8bil) acquisition of Newfield International’s oil & gas production blocks in Peninsula Malaysia, Sabah & Sarawak.

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