SapuraCrest Petroleum

SAPCRES Bags Shell’s Gumusut-Kakap IPF contract
At RM2.9b, this job should have a cost pass-on clause and could earn SapCrest about RM130m in EBIT on a steady blended margin of 4.5%.

Maintain forecasts as this ‘in’was expected, but further delays and cost leakages from Sapura 3000 may impact forecasts.

Technically upgrade to Hold. Despite having no short term catalysts, further weakness could be capped by its sizeable secured order book and decent dividend yields in this uncertain market environment.

Contract may have ‘cost escalation, pass-on clause'

The 3-year contract, valued at USD825m (RM2.9b) will be executed by SapuraAcergy Sdn Bhd, a JV equally owned by SapCrest and Acergy SA, whereby the Sapura 3000 heavy lift and pipelay vessel will be mobilized. Structure-wise, we think this IPF contract is similar to SapCrest’ other recent local projects, which have ‘ost escalation, pass-on clauses’that nearly eliminates execution risks, offering SapCrest a stable and secured earnings flow.

Could contribute EBIT of RM43m p.a. over FY10-12.
We are keeping our earnings forecasts unchanged (which is conservative relative to consensus) as we had already incorporated this win into our forecasts. We estimate SapCrest could theoretically earn about RM130m in EBIT from this project, or RM43m p.a. over the next three years based on a blended margin of 4.5%. However, earnings could fall below expectations on: (i) rising opex at its 50% associate, which owns the Sapura 3000 vessel, and (ii) implementation delays at the Gumusut-Kakap project (commencement date not mentioned) which may stretch earnings recognition beyond three years. A sensitivity analysis suggests that a RM10m delay in revenue recognition for this project could negatively impact net profit by RM1m.


Technical upgrade to Hold and raise TP to RM0.80 (from RM0.74)
On 1x book value, the contract win and value are within our expectations, as highlighted in our previous reports in Sep and Nov ’8. However, we are pleasantly surprised at the timing of the award, which comes amid a sluggish E&P environment. We have technically upgraded SapCrest to a Hold. Although we are not expecting any other new catalysts anytime soon, earnings for thenext 2 years are already backed by firm orderflows. PER valuations are slightly above regional service providers, but these are justified, as there are no direct comparables in the Asian market. Its share price should also be supported by its decent dividend yield of 7.5%.

Details of the Gumusut-Kakap field and the USD825m project
The Gumusut-Kakap field is located in water depths of 1,200m offshore Sabah. The fields, Block J and K, are the first deepwater opportunities for Shell in Malaysia. The major portion of the works will be performed by SapCrest’s dynamically-positioned heavy lift and deepwater pipelay vessel, Sapura 3000.


The Sabah Shell Petroleum Company, which awards the Gumusut-Kakap Offshore field jobs, requires SapCrest to provide and perform project management, procurement, engineering, transportation and installation services works for:

1. an oil export pipeline and riser, including the shore approach,
   
2. flowlines, jumpers, Steel Catenary Risers (SCRs), Pipeline End Terminations (FLET) and flowline inline structures, and
   
3. mooring wires, chains and piles for a semi-submersible Floating Production System
   (FPS), including towing to offshore and installation.