THE COMPANY: With the completion of the merger between SapuraCrest and Kencana, and the listing of the merged entity on the main market of Bursa Malaysia in May 2012, SapuraKencana Petroleum (SKP) has become the largest Malaysian oil and gas (O&G) service provider that is not owned by Petronas, after Bumi Armada. As a result of the merger, SKP is now an integrated O&G service provider, covering 90% of the oilfield services value chain, including drilling, engineering, procurement and construction, transportation and installation, and marine services. SKP currently lacks design capability, the remaining 10% of the value chain, although it has plans to acquire this capability in the long term.
While SapuraCrest and Kencana were already highly regarded, competent service providers in their respective fields of fabrication, and transport and installation previously, SKP now has the combined assets and capabilities to target all three stages of a typical oil and gas field lifecycle, i.e., exploration, development and production. Coupled with a significant market cap and broader range of assets, SKP is now able to compete for jobs at the main contractor level, with more direct control over all aspects of engineering, procurement, construction, installation and commissioning (EPCIC) tenders, as opposed to their previously separate focuses on subcontracting jobs. The merger also resulted in SKP having a 50% stake in the marginal field Berantai, after combining the 25% stakes that SapuraCrest and Kencana each had in the project, with the other 50% owned by UK-listed Petrofac.
DEVELOPMENT STRATEGY: Moving forward, SKP’s revenues will be supported by its current order book as of the end of the second quarter of fiscal year (FY) 2013 (year end: January) of approximately RM14.5bn ($4.67bn), which would sustain it for the next two-and-a-half years. SKP intends to maintain its order book at existing levels, implying a 20% success rate per annum for its current tender book of RM25bn ($8.06bn). Its order book now consists of various jobs across the globe, with Malaysia accounting for some 46% of the total amount, followed by Brazil and the Gulf of Mexico with 32% and Australia at 16%.
From a macro perspective, crude oil prices are expected to remain volatile moving forward, underpinned by weak global economic conditions. However, O&G exploration and production activities across the globe are set to continue while long-term crude oil price expectations remain above the commercial economic threshold of $60-80 per barrel. In Malaysia the O&G sector is one of the government’s main focus points for its Economic Transformation Programme given the prospects of decreasing production from maturing oilfields. To replenish the depleting reserves, Malaysia’s national oil company Petronas has outlined three strategies that are expected to provide jobs for local O&G service providers: enhanced oil recovery (EOR) on existing fields, such as the ongoing Tapis EOR project; development of marginal fields internally and through risk service contracts (RSC) with local and foreign players; and adding more resources to its resource base by further increasing exploration activities in new areas, such as deepwater fields. Petronas and its production-sharing contract operators are expected to spend $59bn in the next five years, the bulk of which is due to be set aside for exploration and production activities, providing ample opportunities for local O&G service providers.
Furthermore, to reduce a reliance on foreign O&G service providers and to create local champions in the sector, the government is looking to increase the participation of local providers by means of higher local content in the development of oilfields. This provides a strong platform for SKP to win local EPCIC jobs as its broader range of assets and capabilities brought about by the merger is further supplemented by its home ground advantage. Notwithstanding the EPCIC jobs, SKP is also aiming to secure more marginal fields’ RSCs, which would provide it with revenues from the development of the field and a recurring income from the crude oil/gas once the field enters production stages.
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