SapKen acquisitions bear fruit


  • Business
  • Saturday, 27 Sep 2014

THE fruits of SapuraKencana Petroleum Bhd’s acquisitions are starting to show.

While SapuraKencana’s second quarter net profit to July 31, 2014 increased by an expected 8.61% to RM445.8mil, what perhaps stood out was that despite some divisions performing short of expectations, smoother earnings results are a high likelihood moving forward.

The other notable fact is that margins are improving, especially for its offshore construction and subsea services (OCSS). Overall, margins in the second quarter improved to 19.5% from 18.1% in the same quarter of the previous year.

A huge reason for SapuraKencana’s smoother earnings is due to the finalisation of two acquisitions – that of Sapura Kencana Energy Inc (SKEI), (formerly known as Newfield Malaysia Holding Inc), and Seadrill Ltd in February 2014 and April 2013.

So now, earnings from those businesses are starting to trickle in.

Come the end of SapuraKencana’s financial year in Jan 31, 2015 (FY15), this will be the first time it recognises fully the earnings from its SKEI and Seadrill acquisitions.

“The more substantial jump in earnings for SapuraKencana will come in FY16. By then, we can fully see how well its new acquisitions are contributing to the group,” says one analyst.

The consensus is for SapuraKencana to deliver earnings of RM1.44bil for FY15 and RM1.69bil for FY16.

Out of a Bloomberg poll of 22 analysts only one has a “sell” call, while rest are “buy” calls.

The 12-month target price by analysts is pegged at RM5.52. SapuraKencana is down 15.52% on a year-to-date basis to RM4.13. At this price, it has a market capitalisation of RM24.25bil.

Seadrill is the second largest shareholder in the company with an 8.18% stake. Excluding Seadrill, some 22.8% of the company is held by foreigners.

The numbers this quarter

For the second quarter, some analysts had been anticipating SapuraKencana’s drilling division to deliver better results.

Looking into its numbers, the OCSS and Drilling & Energy Services (DES) contributed RM1.08bil and RM1.18bil respectively to revenue, while fabrication and hook-up commissioning (FHUC) delivered RM496.9mil.

Operating profit-wise, the DES segment was the most profitable, delivering RM303.68mil, while the OCSS segment delivered RM209.97mil. The FHUC segment recorded an operating profit of RM72.8mil

The drilling segment could have delivered higher topline figures if not for four of its rigs, namely T9, T10, T20 and Teknik Berkat, being out of action.

Analysts are expecting operations of these rigs to pick up closer to year-end.

Nonetheless, despite those rigs being out of work, the overall earnings met analysts’ estimates.

“SapuraKencana Petroleum reported second quarter core net profit of RM352.1mil, bringing the first half core net profit to RM686.4mil. This made up 50% of our full-year FY15 estimates (RM1.38bil) and 47.6% of consensus (RM1.44bil),” says one analyst from Kenanga Research.

Meanwhile, on a first-half basis, the numbers were a lot more impressive, with net profit jumping a whopping 89.48% to RM955.22mil on the back of a 24.93% increase in revenue to RM5.14bil.

In fact, the first half pre-tax profit also hit RM1bil for the first time, fuelled mostly by contributions from SKEI and Seadrill’s assets.

Earnings per share jumped to 15.94 sen from 9.17 sen.

These big numbers were, however, contributed by a one-off gain of RM177.9mil as a result of the Newfield acquisition.

Stripping that one-off gain out, SapuraKencana’s core first quarter earnings of RM334mil still made up 24% of consensus estimates.

SapuraKencana’s order book now stands at RM26.8bil.

Brazil is its largest market, accounting for 49% of the order book, followed by Malaysia (31%), Australia (4%), Africa (4%), and others at 12%.

In terms of businesses, OCSS is the biggest contributor with 62%, followed by drilling (19%), energy and joint ventures (10%) and fabrication, hook-up & commissioning (9%)

SapuraKencana is the world’s largest tender rig operator with 56% market share, compared to 7% previously. It has 21 rigs.

Looking forwared

While CIMB Research analyst Norziana Mohd Inon is expecting steady earnings from the rigs division, she nevertheless anticipates a soft second half due to the South-East Asian monsoon season in the fourth quarter. It is during this time that the OCSS division slows down.

She is expecting this monsoon effect to be mitigated by SapuraKencana’s Brazilian project.

In June, Sapura Diamante, the first of Sapura Navegacao’s six pipelay support vessels (PLSV) started work in Brazil, three months ahead of schedule. The second PLSV, Sapura Topazio, will be deployed next month.

SapuraKencana’s offshore operations in Brazil are being executed by its Brazilian joint-venture company, Sapura Navegacao Maritima (SNM), a 50:50 venture with offshore drilling firm, Seadrill Ltd.

They have two contracts worth US$4.1bil.

“We continue to value the stock at 23.4x FY15 PE, a 40% premium over our implied target market PE of 16.7x, but still within the historical PE range of the oil and gas big caps,” says Norziana.

She maintains her “Add” rating, with strong order book momentum and a successful E&P venture as its potential re-rating catalysts.

As of the period, SapuraKencana has long-term borrowings of RM13.96bil and short-term borrowings of RM1.29bil.

For the six-month period, its cash position has also improved to RM1.6bil from RM1.14bil previously.

SKEI

On its exploration and production venture, SKEI will drill another five wells in SK408.

In early September, SKEI discovered gas at Bakong-1, the fifth and final well in its 2014 drilling campaign within the SK408 production-sharing contract area offshore Sarawak.

With the newest discovery, this brings its total gas discovered to more than 3 trillion std cu ft of gas in-place.

“Likewise, at the SK310 gas field, 3 trillion std cu ft of gas has been discovered, but first gas is expected to come through earlier in 2017,” says Norziana.

Kenanga Research says SapuraKencana is targeting to transform its SK310 discoveries to 2P (proven and probable) reserves by end this year.

Meanwhile, SKEI’s gross oil production at the PM318, PM323, PM329 and AAKBNLP fields stands at 50,000-60,000 barrels per day.

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