Company Note - CIMB Note IMPORTANT DISCLOSURES, ... SAKP is the product of the merger of SapuraCrest...

Oil & Gas - Equipment & Svs│Malaysia│December 21, 2016

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Company Note

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.

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SapuraKencana Petroleum The only way is up

We resume coverage of SAKP with a comprehensive revision of forecasts. ■ SAKP is the bellwether O&G services stock in Malaysia, with direct exposure to oil ■and gas production, and key services like drilling, pipe-laying, HUC, and fabrication.

While the medium-term earnings outlook is weak, in our view, the stock has declined ■~70% since peaking in late-2013, hence the bad news may be in the price.

We have an Add rating, and a SOP-based target price of RM1.87, as we believe the ■risks are now skewed to the upside with planned global action to curtail oil output.

The bellwether oil and gas services stock in Malaysia SAKP is the product of the merger of SapuraCrest and Kencana Petroleum in 2012, which brought together the drilling rig, pipe-laying and subsea construction businesses on one side, and the yard fabrication business on the other. Subsequent to the merger, SAKP expanded is tender drilling rig business by purchasing Seadrill‟s assets in 2013, and then purchased Newfield Malaysia‟s oil and gas blocks in 2014. The result is an oil and gas giant in the local context, with tentacles across the entire value chain.

SapuraKencana Energy (SKE) set for a major profit uplift SAKP‟s energy business is currently producing from legacy oil blocks in Peninsular Malaysia at a loss, based on spot oil prices. But when gas from the SK310 B15 block starts producing from late-FY18F, and gas from SK408 begins flowing from late-FY19F, we expect SKE to enjoy a major uplift in profits. Gas from these two blocks are sweet and relatively inexpensive to develop, while Petronas is a keen buyer and willing to sign lucrative gas sales agreements with the wellhead suppliers, in our view.

SapuraKencana Drilling (SKD) SKD has a 50% market share in the global tender drilling rig business. Tender rigs offer a niche drilling solution, unlike the more popular jack-up rigs. As such, there are only 30 tender rigs available for charter globally, and only eight competitors to SKD. Speculative newbuilding orders have been few and fleet growth is limited. These dynamics have kept SKD‟s EBITDA margins high at 40-50%, and although we have projected net losses for SKD in the next few years, we believe they will be manageable to the group as a whole.

Engineering & Construction (E&C) doing respectably We believe SAKP won RM3.8bn in new E&C contracts in the 9M from 1 Feb to 31 Oct 2016, slightly more than the revenue recognised in the period, keeping its E&C orderbook from depleting. In our view, this is no small feat given the reduced willingness by oil majors to spend and pricing pressures. Separately, the Brazil PLSV JV continues to do well, with an almost 100% technical utilisation and charters paid on time.

Weak medium-term earnings outlook… SAKP achieved core net profit in excess of RM1bn in the three years to FY16, as a result of the orderbook accumulated prior to the oil price downturn. But we expect FY17F net profit to fall, and medium-term net profit to remain depressed, as the higher-margin orderbook is depleted. Street estimates appear to be too bullish, in our view.

…but share price momentum could be skewed to the upside Given the weak earnings outlook, the stock has already lost ~70% of its value since peaking in late-2013 and appears to have reached a valley in the past six months, in our view, suggesting that the bad news is already in the price. With planned action by OPEC and non-OPEC nations to curtail oil output from 1 Jan 2017, we think sentiment could improve as higher oil prices benefit SAKP directly via its energy output, and indirectly by way of a possible improvement in drilling and subsea construction asset utilisation.

▎Malaysia

ADD (previously HOLD) Consensus ratings*: Buy 4 Hold 12 Sell 2

Current price: RM1.61

Target price: RM1.87

Previous target: RM2.03

Up/downside: 16.3%

CIMB / Consensus: 16.7%

Reuters: SKPE.KL

Bloomberg: SAKP MK

Market cap: US$2,154m

RM9,647m

Average daily turnover: US$3.58m

RM15.32m

Current shares o/s: 5,992m

Free float: 70.0% *Source: Bloomberg

Key changes in this note

Our forecasts have been comprehensively

revised as a result of transfer of coverage.

Source: Bloomberg

Price performance 1M 3M 12M

Absolute (%) 12.6 5.2 -9.6

Relative (%) 11.9 6.5 -9

Major shareholders % held

Tan Sri Dato' Seri Shahril Shamsuddin 17.1

EPF 15.1

Dato' Mokhzani Mahathir 10.3

Analyst(s)

Raymond YAP, CFA

T (60) 3 2261 9072 E [email protected]

SOURCE: COMPANY DATA, CIMB FORECASTS

Financial Summary Jan-15A Jan-16A Jan-17F Jan-18F Jan-19F

Revenue (RMm) 9,943 10,184 7,701 6,762 7,108

Operating EBITDA (RMm) 3,056 3,052 2,238 1,957 2,025

Net Profit (RMm) 1,433 (792) 814 188 148

Core EPS (RM) 0.19 0.20 0.06 0.01 0.03

Core EPS Growth 11% 8% (68%) (82%) 124%

FD Core P/E (x) 8.7 8.0 25.1 136.9 61.0

DPS (RM) 0.044 0.014 0.010 0.010 0.010

Dividend Yield 2.70% 0.84% 0.62% 0.62% 0.62%

EV/EBITDA (x) 7.85 8.02 9.85 11.27 10.55

P/FCFE (x) NA 12.30 5.87 NA 5.63

Net Gearing 131% 134% 106% 107% 102%

P/BV (x) 0.80 0.79 0.74 0.73 0.72

ROE 10.0% 9.9% 3.0% 0.5% 1.2%

% Change In Core EPS Estimates (63.8%) (93.8%) (87.4%)

CIMB/consensus EPS (x) 3.16 0.65 0.28

Oil & Gas - Equipment & Svs│Malaysia│SapuraKencana Petroleum│December 21, 2016

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The only way is up

BACKGROUND

Short profile

SapuraKencana Petroleum (SAKP) is the product of the merger of SapuraCrest and Kencana Petroleum. The merger was proposed in mid-2011 and was completed in May 2012.

Kencana Petroleum‟s primary business prior to the merger was its fabrication yard in Lumut, where it fabricated various offshore oil and gas structures like jackets, offshore platforms, skid processing systems, gas processing modules, subsea equipment and even tender drilling rigs and pipelay barges. Kencana also had a small exposure to hook-up and commissioning (HUC) work, and had started to venture into owning and operating tender drilling rigs and offshore service vessels (OSV).

Prior to the merger, SapuraCrest was positioned primarily in offshore services, such as

The tender drilling rig segment in a JV with Seadrill (which accounted for the largest share of profits),

The transportation and installation (T&I) segment, which involves the installation of pipelines and facilities using both leased and jointly-owned derrick lay vessels and construction vessels, and

Marine services, like HUC work using accommodation barges and AHTS, seabed investigation using geotechnical and geophysical survey vessels, and diving services for Inspection, Repair and Maintenance (IRM) work employing diving support vessels and remotely-operated vehicles (ROV).

Both SapuraCrest and Kencana Petroleum had also taken a combined 50% stake in the Berantai Risk Service Contract (RSC) that was signed with Petronas in January 2011, dipping their toes for the first time in the upstream oil production business.

The merger of SapuraCrest and Kencana Petroleum was completed on 15 May 2012, and created the first-ever integrated EPCIC player in Malaysia – Engineering, Procurement and Construction services at Kencana Petroleum‟s fabrication yard, combined with the Installation and Construction services by SapuraCrest‟s marine vessels, as well as an interest in the Berantai RSC.

Figure 1: Combined capabilities across the oil and gas value chain

SOURCES: CIMB, COMPANY REPORTS


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Figure 2: Combined presence on a typical lifecycle of an oil and gas field


In order to execute the merger, SAKP on 15 May 2012 issued 5,004,366,196 new ordinary shares of RM1.00 each at an issue price of RM2.14 per ordinary share as part of the consideration for the acquisition of the entire businesses of SapuraCrest and Kencana Petroleum. A total cash payment of RM1,843.8m was also paid to the shareholders of both acquired companies.

SAKP issued 2,498,928,847 new ordinary shares of RM1.00 each at an issue price of RM2.00 each to the shareholders of SapuraCrest, together with a cash payment of RM875.1m.

SAKP also issued 2,505,437,349 new ordinary shares of RM1.00 each at an issue price of RM2.00 each to the shareholders of Kencana Petroleum, together with a cash payment of RM968.7m.

For the purpose of accounting for the shares consideration, the fair value of RM2.14 per share as at the date of exchange was recorded instead of issue price of RM2.00 per share as part of the consideration for the acquisition of SapuraCrest and Kencana Petroleum.

On 17 May 2012, SAKP was listed on Bursa Malaysia at a reference price of RM2.24 with a market capitalisation of RM11.2bn (share base of 5,004.4m at that time).

The share price rallied to a peak of RM4.94 on 27 December 2013, taking SAKP‟s market capitalisation to a high of RM29.6bn based on 5,992.2m shares. The market capitalisation has since declined by almost 70% from its peak to approximately RM9.6bn today, with the rate of decline especially steep from mid-2014 onwards as oil prices began to correct significantly.


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Figure 3: Brent crude oil price (US$/bbl) and SAKP's share price (RM)

SOURCES: CIMB, BLOOMBERG

Subsequent to the merger, SAKP entered into two major M&A transactions.

The first was the acquisition of Seadrill‟s tender drilling rig business. On 5 November 2012, SAKP entered into a Memorandum of Understanding with Seadrill Tender Rig Ltd to acquire the latter's tender and semi-tender drilling rig business. The acquisition of Seadrill‟s tender drilling rig business was completed on 30 April 2013 at a final equity valuation of US$2,555m, of which US$350m was settled via the issue of new SAKP shares, and the rest by cash or deferred consideration. The acquisition of Seadrill‟s tender drilling rig assets catapulted SAKP to a 50% global market share of the tender rig business.

The second was the acquisition of Newfield‟s oil and gas blocks in Malaysia. On 22 October 2013, SAKP entered into a conditional sale and purchase agreement to acquire all the shares in Newfield Malaysia from Newfield International Holdings. The acquisition was completed on 11 February 2014 at an adjusted purchase price of US$895.9m, settled entirely in cash. This acquisition gave SAKP direct equity interest in nine production and exploration Production Sharing Contract (PSC) blocks in Peninsular Malaysia, Sabah and Sarawak. For the first time, SAKP had become a producer of oil and gas, with direct exposure to the price of oil and gas, and no longer just a service provider.

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ENERGY BUSINESS

Berantai Risk Service Contract (RSC)

SAKP‟s foray into the upstream energy business started in January 2011, when it signed the Berantai Risk Service Contract (RSC) with Petronas. At that time, SAKP had not yet been formed, and it was SapuraCrest and Kencana Petroleum that together entered into partnership with Petrofac to sign the Berantai RSC. SapuraCrest and Kencana Petroleum each had a 25% stake in the Berantai RSC, with operator Petrofac holding a 50% stake.

The Berantai RSC contract was signed for a nine-year period from 31 January 2011 to 30 January 2020, and gas production from the field off the east coast of Peninsular Malaysia commenced from October 2012. The gas production at Berantai was aided by the FPSO Berantai, which is an asset owned by Berantai Floating Production Limited, a 49%-owned associate of SAKP.

However, on 11 July 2016, SAKP and Petrofac mutually agreed with Petronas to terminate the RSC effective 30 September 2016, with compensation to be paid by Petronas over the 12 months until mid-2017. More details on the termination later.

Brief history of RSCs

The Berantai RSC was the first-ever Risk Service Contract to be signed by Petronas. It was followed by Petronas signing five more RSCs.

In August 2011, Dialog, Roc Oil and Petronas Carigali partnered together to sign the Balai-Betara Cluster RSC to develop the fields offshore Bintulu. Oil production from this RSC commenced in November 2013, but the mutual termination of this RSC was signed in February 2016, to take effect in December 2016.

In June 2012, Coastal Energy and Petra Energy signed the Kapal, Banang and Meranti (KBM) Cluster RSC, which is located off the east coast of Peninsular Malaysia.

In October 2013, the Tembikai-Chenang Cluster RSC (offshore Terengganu) was signed with Vestigo Petroleum, which is 100% owned by Petronas and tasked with developing marginal fields.

In March 2014, Enquest and Uzma Energy signed the Tanjong Baram Small Field RSC, located offshore Sarawak.

In June 2014, Scomi Energy, Australia-based Octanex and Vestigo Petroleum entered into a partnership to sign the Ophir RSC, located off the east cost of Peninsular Malaysia.

Termination of the Berantai RSC

The Berantai RSC was terminated by Petronas effective 30 September 2016, slightly more than three years ahead of the end of the contract, on mutually-agreeable terms. The operations of the field have since been handed over to Vestigo Petroleum, which is a wholly-owned subsidiary of Petronas.

As a result of the termination, Petronas was obligated to pay compensation, such that the RSC contractors will obtain approximately the same IRR.

There were two parts to the termination. First, the physical handover of the field assets (wellhead platforms, pipelines, etc.) and of the FPSO Berantai was completed by 30 September 2016. Second, the financial compensation will be paid by Petronas over a period of 12 months. As it stands today, part of the compensation has already been paid, with the remaining to be paid by June 2017.


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Figure 4: Key events for SapuraKencana Energy (SKE)

SOURCES: CIMB, COMPANY REPORTS AND ANNOUNCEMENTS

Date Events and descriptions

31-Jan-11 The Berantai RSC was signed on 31 January 2011 with PETRONAS and was the first RSC awarded by Petronas. It is for the development and production of

petroleum from the Berantai field, located offshore Peninsular Malaysia over nine years. Participating interests in the Berantai RSC are held 25% by Sapura

Energy Ventures Sdn Bhd, 25% by Kencana Energy Sdn. Bhd. and 50% by Petrofac Energy Developments Sdn Bhd.

30-Nov-12 On 30 November 2012, SAKP announced that the gas production from the Berantai field, offshore Peninsular Malaysia, commenced on 20 October 2012.

Under the Risk Service Contract dated 31 January 2011, Berantai was jointly developed by Sapura Energy Ventures Sdn Bhd (SEV) and Kencana Energy Sdn

Bhd (KE), both wholly-owned subsidiaries of SapuraKencana, and Petrofac Energy Developments Sdn Bhd (PED).

The Berantai field is located approximately 150km offshore Terengganu, Malaysia, 10km south of the Tapis Field and 30km northeast of the Angsi Field. The

development comprises a wellhead platform connected to a floating production storage and off-loading (FPSO) vessel, the FPSO Berantai. Gas is exported by

a 30km subsea pipeline to the Petronas Carigali-operated Angsi Field and onwards into the Peninsular Malaysian gas grid.

22-Oct-13 On 22 October 2013, SAKP entered into a conditional sale and purchase agreement to acquire all the shares in Newfield Malaysia from Newfield International

Holdings Inc (which is wholly-owned by US-listed Newfield Exploration Company) for cash consideration of US$898m.

11-Feb-14 On 11 February 2014, SAKP completed the acquisition of Newfield Malaysia at an adjusted purchase price of US$895.9m. This acquisition was completed

through SapuraKencana Energy Inc. (SKEI), a newly incorporated wholly owned subsidiary.

9-Jun-14 On 9 June 2014, SapuraKencana Energy (SKE) announced four significant gas discoveries in the SK408 Production Sharing Contract (PSC) area, offshore

Sarawak, Malaysia. All four wells have discovered non-associated natural gas within the primary target Late Miocene Carbonate reservoirs. These are the first

four wells of a 10-well commitment in the SK408 PSC.

The first well, Teja-1, located southeast of the Cili Padi gas field encountered 219 metres of gross column whilst the Gorek-1 discovery, southeast from F23

gas field encountered a gross gas column of 235 metres.

The third well, Legundi-1, located south of F23 gas field was drilled in a down-flank location and encountered a 139 metres gross gas column, and the fourth

well, Larak-1, located south of F6 gas field, also drilled in a down-flank location encountered a gross gas column of 333 metres.

29-Aug-14 On 29 August 2014, SKE announced announced another gas discovery from Bakong-1, the fifth and final well in its 2014 drilling campaign within the SK408

PSC.

Bakong-1 is a significant discovery with a gross gas column in excess of 600 metres. The five discoveries to date have found in excess of 3 Trillion standard

cubic feet (Tscf) of gas in-place. A further 5-well exploration campaign in 2015 will target additional gas prospects with significant potential and complete the

exploration commitment in the SK408 Block.

20-Nov-14 On 20 November 2014, SAKP announced that it has entered into Sale and Purchase Agreements to acquire the entire interest of Petronas in three blocks

offshore south Vietnam (Blocks 01/97 & 02/97, Blocks 10&11.1, Block 46-CN) for a total purchase price of US$400m. The economic effective date of the

transaction is 1 January 2014 and SapuraKencana is entitled to net revenues from these Blocks from that date. The closing of the transaction is subject to

customary condition precedents including the approval of relevant government authorities.

The acquisition is for Petronas interests of 50% of Block 01/97 & 02/97 (Cuu Long Basin), 40% of Block 10&11.1 (Nam Con Son Basin) and 36.85% of Block

46-Cai Nuoc (Malay-Tho Chu Basin). These blocks are located primarily in shallow waters offshore South Vietnam. This acquisition adds to the Group‟s

reserves and resource base and increases its oil production to balance the natural decline from currently producing assets.


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Figure 5: Key events for SapuraKencana Energy (SKE) – continued


The Newfield acquisition

On 22 October 2013, SAKP took a big leap forward by entering into a conditional sale and purchase agreement to buy all the shares in Newfield Malaysia Holdings Inc. for cash consideration of US$898m. Newfield Malaysia was wholly-owned by the US-listed Newfield Exploration Company, which wanted to sell Newfield Malaysia in order to focus on producing onshore shale oil in the US.

Newfield Malaysia owned 100% interest in Newfield Peninsula Malaysia Inc., Newfield Sabah Malaysia Inc., and Newfield Sarawak Malaysia Inc., which have participating interests in nine Production Sharing Contract (PSC) oil and gas blocks located in offshore Peninsular Malaysia, Sabah and Sarawak.

Newfield Peninsula Malaysia had interest in the following oil and gas blocks: PM323 (60%), PM329 (70%), PM318 (50%) and AAKBNLP (50%).

Newfield Sabah had interest in the New Oil and New Facilities in Tembungo (50%).

Newfield Sarawak has interest in the following oil and gas blocks: SK310 (30%), SK408 (40%), SK319 (25%) and Deepwater 2C (40%).

According to the shareholder circular dated 21 November 2013, Newfield Malaysia had 2P reserves of 36 mmboe as at 31 December 2012, and the estimated production of oil as at 22 October 2013 was 23,000 bbl/day.

The purchase price was determined based on DCF valuation of the expected future cashflows, taking into consideration the experience and expertise of Newfield Malaysia's personnel and processes, and SAKP's future prospects as an upstream oil and gas operator.

We suspect that the Peninsular Malaysia blocks accounted for the largest chunk of the purchase consideration, since they were already producing at the


20-Nov-14 On 20 November 2014, SAKP announced that it had, through its wholly-owned subsidiary, SapuraKencana Energy Sabah Inc (SKESI), entered into two

Production Sharing Contracts (PSCs) for Blocks SB 331 and SB 332 with Petronas effective 20 November 2014, for a period of 27 years.

These blocks are located in the eastern and southern part of Sabah covering about 31,047 square kilometres. Under the terms of both PSCs, SKPB will operate

the blocks with participating interest of 70%. The partners in the PSCs are Petronas Carigali Sdn Bhd and M3nergy Berhad.

Under the PSC, the parties are committed to drill two wildcat wells and acquire 500 line km of new 2D seismic data in Block SB331 and to drill one wildcat well

and acquire 100 line km of new 2D seismic data in Block SB332. The parties are also committed to do other exploration works such as integrated study based

on existing data as well as Surface Geochemical Survey and an additional Coal Bed Methane study.

M3nergy Berhad is an Exploration and Production company with strategic focus on marginal field development. With over 30 years of experience, M3nergy has

evolved into a major FPSO & FSO player. M3nergy owns and operates high value FPSO/FSO assets in South East Asia and hold 100% interest in a PSC

block offshore West Java, Indonesia.

4-Nov-15 On 4 November 2015, SapuraKencana Energy Inc (SKE) announced that it had secured Field Development Plan (FDP) approval from Petronas for the

SK310 B15 gas field development project. With this approval, SKE will commence the development phase for this project and the first gas delivery is targeted

for 4Q17. The B15 field which was discovered in December 2010. The development will comprise a central processing platform with a 35 km gas evacuation

pipeline to be tied into existing infrastructure. The B15 field is expected to produce 100 MMscfd of hydrocarbon gas for the Petronas‟ LNG complex in Bintulu,

Sarawak.

22-Jan-16 On 22 January 2016, SAKP announced that the conditional sale and purchase agreements on the proposed acquisition of three blocks in Vietnam have been

terminated by mutual agreement. The SPS was for the acquisition of the entire interest of Petronas in three blocks offshore south Vietnam (Blocks 01/97 &

02/97, Blocks 10&11.1, Block 46-CN) for a total purchase price of US$400m.

31-May-16 On 31 May 2016, SapuraKencana Energy (SKE) announced another significant gas discovery from its three wells 2015 drilling campaign within the Block

SK408 Production Sharing Contract (PSC) area, offshore Malaysia. All three wells targeted non-associated gas within the primary target Late Miocene

Carbonate reservoirs.

The first well, Jerun-1 is a significant discovery located approximately 5km north of the 2014 Bakong gas discovery. Based on analysis of electric log, pressure

and sample data Jerun-1 has an interpreted gross gas column of approximately 800m in the primary target reservoir and is a multi-TCF gas discovery.

Jeremin-1, located approximately 15km west of the F9 gas field encountered a 104m gross gas column.

Putat-1, located approximately 20km north of the Cili Padi gas field is confirmed as a dry hole. All wells have been safely plugged and abandoned.

These two wells, Jerun-1 and Jeremin-1 together with the earlier five discoveries within the SK408 block are close to existing infrastructure supplying gas to one

of the world‟s largest LNG facilities at Bintulu, Sarawak.

27-Jun-16 On 27 June 2016, SapuraKencana Energy Sarawak Inc (SKE) signed the SK310 Upstream Gas Sales Agreement (UGSA) in relation to the production of gas

from the B15 Gas Field between Petronas as Gas Buyer and the SK310 PSC Contractors as Joint Sellers.

11-Jul-16 On 11 July 2016, SAKP announced that it had reached mutual agreement with Petronas for the cessation of the Berantai Risk Service Contract (RSC),

together with their partner, Petrofac Energy Developments Sdn. Bhd. The cessation will be effective on 30 September 2016. Petronas will reimburse all

outstanding capital and operational expenditures to the RSC contractors by June 2017, and the ownership of Berantai FPSO will be transferred to Petronas.

The remaining outstanding costs of the FPSO will form part of the reimbursement by Petronas.


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time of the deal. We believe the second largest chunk of the purchase price would have likely come from the B15 and B14 gas fields at the SK310 block, which at the time of the transaction had already been discovered, but were not yet producing. The remaining blocks, i.e. SK408, SK319, Deepwater 2C and the New Oil and New Facilities in Tembungo, were still in the exploration stage at the time of the transaction, and would not likely have made up a significant portion of the purchase price, in our view.

The transaction was completed on 11 February 2014 at an adjusted price of US$896m. The purchase price was to be funded by way of external debt (US$700m) and internal funds (US$196m), although SAKP later took new borrowings to finance the entire purchase consideration.

In the shareholder circular relating to the transaction, it was disclosed that the net book value of Newfield Malaysia was only RM1,277m (US$418m) as at 31 December 2012, which was substantially below the purported purchase price. However, SAKP later revised upwards the value of the acquired Newfield assets, resulting instead, in a negative goodwill that was then credited into the P&L.

Newfield Malaysia was later renamed SapuraKencana Energy Inc. (SKE), with Newfield Peninsular Malaysia, Newfield Sabah and Newfield Sarawak renamed SapuraKencana Energy Peninsular Malaysia Inc., SapuraKencana Energy Sabah Inc., and SapuraKencana Energy Sarawak Inc., respectively.

Subsequent to the acquisition of Newfield, SKE made significant discoveries in SK408 – twice in mid-2014, and then once more in mid-2016 – finding large gas deposits in seven out of eight wells drilled. Conversely, the oil price began a precipitous decline from mid-2014 onwards.

In our opinion, the positive valuation impact from the SK408 discoveries appear to have more than compensated for the deflationary effects of the oil price correction on the entire portfolio of energy assets held by SKE. The balance sheet valuation of the Expenditure on Oil & Gas Properties as at 31 October 2016 was RM4,134m (US$986m), which is already more than the original Newfield acquisition price of US$896m, not even counting the cash accretion from the ongoing production from the Peninsular Malaysia blocks.

In short, the Newfield acquisition appears to be value-accretive, in our view, even after taking into account the effects of the oil price rout.

SapuraKencana Energy Peninsular Malaysia (SKE PM)

SKE PM has equity ownership in four Peninsular Malaysia blocks. Two of the blocks (PM323 and PM329) are operated by SKE PM, while the remaining two blocks (PM318 and AAKBNLP) are operated by Petronas Carigali.

PM323

SKE PM owns a 60% equity stake in the PM323 block, with Petronas Carigali owning the remaining 40%. PM323 is operated by SKE PM. The PSC contract took effect from 15 June 2005, and will expire on 14 June 2034, after 29 years.

PM323 is an oil-producing block located 300km offshore Terengganu and is in shallow waters of around 60-70m depth. It has three producing fields, of which East Belumut is the most significant. Production from the West Belumut field is very minimal and production from the Chermingat field has been exhausted.

At the East Belumut field, a Central Processing Platform (CPP) is hosted on the East Belumut BEL-A platform, which gathers the oil from West Belumut and previously from Chermingat as well. From here, the oil is exported using pipelines to the Kerteh oil terminal via the Pulai-A field.

Production from PM323 started from 2008 onwards and should be exhausted by 2021, based on SAKP disclosure, well before the expiry of the PSC in 2034.


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SKE PM undertook a three-well production drilling campaign at PM323 in early-2016 that helped to add to its reserves. According to SAKP, from May 2017, SKE PM and Petronas Carigali will likely drill a further seven production wells in PM323 in order to increase the level of reserves and arrest the natural decline in production at the block.

Figure 6: SAKP's share of energy production, net of royalty and production tax (boepd)


PM329

SKE PM owns a 70% equity stake in the PM329 block, with Petronas Carigali owning the remaining 30%. PM329 is operated by SKE PM. The PSC contract took effect from 9 December 2008 and will expire on 8 December 2037, after 29 years.

PM329 is an oil-producing block located 250km offshore Terengganu and is in shallow waters of around 50-60m depth. It has two producing fields, of which East Piatu is the most significant. Production from the West Piatu field is very minimal.

At the East Piatu field, a Central Processing Platform (CPP) is hosted on the East Piatu-A platform, from which the oil is exported to third-party facilities via pipeline infrastructure.

Production from PM329 started from 2012 onwards and should be exhausted by 2021, according to SAKP disclosure, well before the expiry of the PSC in 2037.

PM318

SKE PM owns a 50% equity stake in the PM318 block, with Petronas Carigali owning another 50%. PM318 is operated by Petronas Carigali. The PSC contract took effect from 25 May 2004, and will expire on 24 May 2033, after 29 years.

PM318 is an oil-producing block located 245km offshore Terengganu and is in shallow waters of around 60-80m depth. It originally had three producing fields – Puteri, Abu South West and Padang – but the Puteri field is the only field still in production today.

Oil production from the Puteri field (and previously from the Padang field) is processed on the FPSO Bunga Kertas, which is located at the proximate Penara field (at the AAKBNLP block). Oil production from the Abu South West field (it has since ceased) was previously tied back to FSO Abu, which was located at the proximate Abu field (at the AAKBNLP block). FSO Abu was demobilised from September 2016.

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Oil production from Peninsular blocks (boepd) Gas production from SK310 B15 Gas production from SK310 B14 Gas production from SK408

Gorek and Larak fields to begin production

Bakong, Jerun and Jeremin fields to begin production

Teja and Legundi fields to begin production


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Production from PM318 started from 2008 onwards and should be exhausted by 2021, based on SAKP disclosure, well before the expiry of the PSC in 2033. The remaining reserves at the Puteri field are minimal.

AAKBNLP

AAKBNLP stands for five separate fields, named Abu, Abu Kecil, Bubu, North Lukut and Penara. SKE PM owns a 50% equity stake in the AAKBNLP block, with Petronas Carigali owning another 50%. AAKBNLP is operated by Petronas Carigali. The PSC contract took effect from 24 May 2004, and will expire on 23 May 2024, after 20 years.

AAKBNLP is an oil-producing block located 245km offshore Terengganu and is in shallow waters of around 50-70m depth. Of its five fields, production from Abu and Abu Kecil has ceased after the demobilisation of FSO Abu in September 2016. Bubu never produced under the AAKBNLP PSC structure, and was subsequently carved out into a separate RSC for intended award to Vestigo Petroleum, but the award did not materialise. This leaves only two producing fields, i.e. North Lukut and Penara.

Oil production from the North Lukut and Penara fields is processed on the FPSO Bunga Kertas, which is located at Penara.

Production from AAKBNLP started from 2004 onwards and should be exhausted by 2021, based on SAKP disclosure, before the expiry of the PSC in 2024. The remaining reserves at the AAKBNLP block are minimal.

SapuraKencana Energy Sarawak (SKE SK)

SKE SK has equity ownership in three Sarawak blocks. Two of the blocks are operated by SKE SK (SK310 and SK408), while the SK319 block is operated by Sarawak Shell.

SK310

SKE SK owns a 30% equity stake in the SK310 block, with Petronas Carigali owning 40% and Diamond Energy the remaining 30%. Diamond Energy is a subsidiary of the Mitsubishi Corporation. SK310 is operated by SKE SK. The PSC contract took effect from 17 June 2008 and will expire on 16 June 2037, after a period of 29 years.

Two gas fields have been discovered in SK310. The first discovery of the B15 gas field was made in December 2010, while the B14 gas field was the second discovery made in April 2013. Both discoveries were made by Newfield, prior to its acquisition by SAKP. Both gas fields are about 70km offshore Sarawak, and in shallow waters of 70-80m.

Neither field has yet to produce any gas. But B15 is expected to begin production from 4QCY17F. Production from B14 is a long way off – potentially starting in FY25F – but subject to significant uncertainty, in our view, due to the high level of impurities in the B14 reserve.

SK310 B15

B15 has gross reserves of 300 bcf, but technically recoverable reserves are estimated at 200 bcf, according to Clarksons. Despite the small size of the reserves, the development of the B15 gas field has been prioritised by Petronas because it is „sweet‟ gas with a low level of H2S impurities. This means that it will be cheaper to develop and to produce, as it does not require high levels of processing.

We expect the B15 field to produce 100 mmscfd of gas for supply to the Petronas LNG complex in Bintulu over seven years from late-2017F to late-


11

2023F, but the actual end-to-end duration is closer to 5½ years, based on SAKP disclosure.

On 4 November 2015, SKE announced that it had secured the Field Development Plan (FDP) approval from Petronas for the B15 project. First gas delivery is targeted for 4QCY17F. The development will comprise a central processing platform (CPP) on the field itself, with a 35km gas evacuation pipeline to be tied into existing infrastructure, i.e. the B11 field. From the B11 field, the gas will be sent to the E11 hub, from which it will be transported on the trunk pipeline to the Bintulu LNG liquefaction terminal.

We estimate the total development capex for the project at US$300m, of which SKE SK‟s 30% share amounts to US$90m. This includes the cost of fabricating, installing and commissioning the CPP, the cost of development drilling, and the cost of the 35km pipeline linking the B15 field to the B11 field. We believe the cost of development drilling is likely to be higher than for „normal‟ pressured wells, given that B15 is a high-pressure, high-temperature gas well.

Nevertheless, the development capex cost had already been revised down from an earlier estimate of US$370m, mainly because the cost of chartering jack-up drilling rigs had declined from when the initial budget was prepared.

We expect SKE to draw on its internal cash resources to fund its portion of the B15 capex.

On 27 June 2016, SKE SK signed the SK310 Upstream Gas Sales Agreement (GSA) in relation to the production of gas from B15 between Petronas, as gas buyer, and the SK310 PSC contractors as joint sellers. Petronas has already locked in buyers for the B15 gas, so we believe it is eager for the project to achieve first gas by 4QCY17, or earlier.

With both the FDP and GSA in place, the B15 reserve is considered a „2P‟ reserve, i.e. proven and probable reserves.

We estimate that the total capex cost would amount to some US$1.51/mmbtu, with opex cost around US$0.50/mmbtu, for a total unit cost of US$2.01/mmbtu. This compares very favourably to a wellhead price which we estimate to be in excess of US$3/mmbtu. As a result, we forecast the B15 field to generate average field-life EBIT margins of between 25% and 30%.

SK310 B14

The B14 field is ten times the size of the B15 field, containing gross reserves of 3,000 bcf, with 2,000 bcf likely recoverable, according to Clarksons. Nevertheless, the development of B14 was pushed back by Petronas as the reserves contain a high level of H2S impurities, requiring the construction of special processing facilities to deal with the highly toxic and highly corrosive gas.

Petronas originally planned to construct onshore H2S processing facilities, but it has shelved this plan. It is unclear if Petronas will revisit this plan, or go with an offshore processing facility. In any case, a decision is not required immediately, as production from B14 is not expected until 2024F. Petronas has de-prioritised production from B14 in favour of potentially bringing forward production of sweet gas from SK408.

With neither FDP approval nor a GSA, the B14 reserve is considered a „2C‟ reserve, i.e. the best estimate of a contingent resource. The costs incurred for the exploration of B14 have already been fully written off.

If production from B14 takes off as expected in 2024, production from the reserve may last as long as perhaps 20 years until 2044, which is beyond the 2037 expiry of the SK310 PSC. However, the PSC partners can negotiate to extend the PSC at a later stage.


12

SK408

SKE SK owns a 40% equity stake in the SK408 block, with Petronas Carigali owning 30% and Sarawak Shell the remaining 30%. SK408 is operated by SKE SK. The PSC contract took effect from 12 December 2012, and will expire on 11 December 2039, after a period of 27 years.

SK408 was an exploration block at the time of the acquisition of Newfield, with no discoveries yet. The acquisition of Newfield was completed in February 2014, and by June 2014, SAKP announced that it had made four significant gas discoveries in the block, i.e. Teja, Gorek, Legundi and Larak. These four wells contained about 1,500 bcf of gas reserves.

In August 2014, SAKP announced another significant gas discovery at the Bakong well, which was estimated to contain another 1,500 bcf of gas reserves.

Two years later in May 2016, SAKP announced another two discoveries – Jerun and Jeremin – which were estimated to contain about 3,000 bcf of gas reserves.

The SK408 block is located 120-180km offshore Sarawak, and in shallow waters with depths of around 80-90m.

Altogether, the seven well discoveries at SK408 were estimated to contain 6,000 bcf of gas reserves that would be supplied to the LNG facilities at Bintulu. All the gas discovered at SK408 is „sweet‟ with low levels of H2S impurities. As a result, they have been prioritised by Petronas for development, ahead of the earlier SK310 B14 discovery, given the lower breakeven costs.

We expect production at SK408 to most likely kick off with the Gorek and Larak fields from late-2018F onwards, as they are modestly-sized field that can be brought online quickly; these two fields will be developed together. Following that, we think the development of the Bakong, Jerun and Jeremin fields may may follow, as these are larger reserves that will need longer forward planning. Production from these three massive fields is expected to commence from early-2022F. That leaves the smaller Teja and Legundi fields, which should probably come online from around early-2025F.

SKE SK is preparing for the submission of the Field Development Plan (FDP) for the Gorek and Larak fields, and we expect Petronas to approve the FDP in late-2017F. This will then be followed by the signing of the Gas Sales Agreement (GSA), in our view. Until the GSA is signed, the SK408 reserves are „2C‟ in nature, rather than „2P‟.

In our view, there is a very strong likelihood that the GSA on SK408 gas will be signed with Petronas. This is the case because of the expected natural decline in Malaysia‟s gas production and Petronas‟s commitment to deliver gas to its buyers, which shapes its desire to buy SK408‟s sweet gas. Also, the location of the SK408 reserves is proximate to existing infrastructure of pipelines and CPPs, and to the Bintulu LNG liquefaction plant, which reduces the costs to develop those reserves.

We believe that SKE is already moving forward with several options on the development of the gas fields at SK408, and once those options are finalised, it will be in a position to give guidance on the amount of capex that will be needed.

For the purposes of our model, we have factored in a total capex cost of US$1.5bn for the development of all seven wells, spread over nine years from FY18F to FY26F. We have budgeted for:

Three separate CPPs located at the Gorek, Jerun and Teja fields,

Development drilling for seven wells and

Pipeline capex to link the fields to the surrounding infrastructure.


13

SK319

SKE SK has a 25% stake in SK319, which is an exploration block located 120km offshore Sarawak and in 91m of water. The block is operated by Sarawak Shell which owns a 50% stake, with the remaining 25% owned by Petronas Carigali. In 2013, Sarawak Shell drilled five appraisal wells, only to encounter non-hydrocarbon bearing sands.

SapuraKencana Energy Sabah (SKE SB)

SKE SB has a 70% equity ownership in two blocks offshore Sabah, i.e. the SB331 and SB332 blocks. SKE SB is the operator for both blocks. Petronas Carigali owns a 20% stake with M3nergy holding the remaining 10% stake. The PSCs for both blocks were signed on 20 November 2014, and are effective for 27 years until 19 November 2041. The PSC contractors have committed to perform seismic studies and drill three wildcat wells; we anticipate these to be done in 2017F.

Blocks relinquished by SKE

In addition to the blocks described above, SKE also acquired Newfield‟s interests in two other blocks, which have since been relinquished. These include SKE‟s 20% share in Deepwater SK2C located offshore Sarawak in relatively deep waters, and SKE‟s 50% share in the Tembungo New Oil Facilities. In addition, SKE took a 35% stake in SB310 during 2015, and performed two exploration wells in that block in early-2016. However, SKE has also relinquished its interest in SB310. Details on these fields can be found in an accompanying table below.

OOil & Gas - Equipment & Svs│Malaysia│SapuraKencana Petroleum│December 21, 2016

14

Oil and gas blocks

Figure 7: SapuraKencana Energy Peninsular Malaysia Inc

SOURCES: CIMB RESEARCH, COMPANY REPORTS, CLARKSONS

Oil and gas blocks

Associated fields

Stake in PSC Operator Start of PSC

contract

End of PSC

contract

Duration Phase Discovery

year

Start of

production

Primary

production

Recoverable 2P

reserves

Remaining 2P

reserves

Notes on

discovery

Location Distance

from shore

Water

depth

Area

% At 1/1/2017F km m sq m

Peninsular Malaysia - held under SapuraKencana Energy Peninsular Malaysia Inc

1 PM323 SKE (60%)

Petronas Carigali (40%)

SKE 15-Jun-05 14-Jun-34 29 Producing Malay Basin, Offshore

Terengganu

300 74

a Chermingat 1991 May-08 Oil 10 mmbbl - 270 60

b East Belumut 1994 Jun-08 Oil 75 mmbbl 17 mmbbl 258 60

c West Belumut 1970 Sep-10 Oil 6 mmbbl < 1 mmbbl 250 70

Notes on PM323

i

ii

iii

Oil and gas blocks

Associated fields


contract

End of PSC

contract


year

Start of

production

Primary

production

Recoverable 2P

reserves

Remaining 2P

reserves

Notes on

discovery

Location Distance

from shore

Water

depth

Area

% At 1/1/2017F km m sq m

2 PM329 SKE (70%)


SKE 9-Dec-08 Dec-37 29 Producing Malay Basin, Offshore

Terengganu

250 60

a East Piatu 1999 Nov-12 Oil 41 mmbbl 17 mmbbl 197 53

b West Piatu 1992 2013 Oil 3 mmbbl 0.27 mmbbl

Notes on PM329

i

The Chermingat oilfield was developed with East Belumut field. Field life expectancy of 8-12 years. Developed via a fixed platform, oil flows via a 10" subsea pipeline to

the East Belumut A central processing platform.

East Piatu-1 was discovered by ExxonMobil. 3D seismic was carried out on Piatu-East Piatu by Orogenic. Kencana HL was awarded a US$62.5m platform construction

contract for the wellhead platform topsides, central processing platform topsides, living quarters and bridge. The structures were delivered in stages in 3Q11. Kencana

was also awarded the procurement and construction of jackets for US$6.9m. Crude oil and gas is processed at the East Piatu-A platform and exported from two

dedicated pipelines to third party facilities.

The East Belumut field was developed with Chermingat field. East Belumut receives oil from Chermingat via a 10" pipeline. Oil is then exported via a 30km x 10"

pipeline to the Pulai A platform, eventually going to shore at Kerteh. Gas produced at East Bulumut BEL-A platform is used for gas lift and injection on the platform as

well as gas lift via a 4" pipeline to Chermingat CHR-A platform.

Development of West Belumut includes two development wells and a wellhead platform. Kencana Petroleum was awarded a contract for fabrication and procurement

of the jacket and topsides and the platform was installed in March 2010. The wellhead platform is tied back to East Belumut A platform. Field life expectancy of 4-8

years.


15

Figure 8: SapuraKencana Energy Peninsular Malaysia Inc – continued


Oil and gas blocks

Associated fields


contract

End of PSC

contract


year

Start of

production

Primary

production

Recoverable 2P

reserves

Remaining 2P

reserves

Notes on

discovery

Location Distance

from shore

Water

depth

Area

% At 1/1/2017F km m sq m

3 PM318 SKE (50%)


Petronas

Carigali

25-May-04 24-May-33 29 Producing Malay Basin, Offshore

Terengganu

245 60-80 1,600

a Puteri 2005 Oct-08 Oil 15 mmbbl 3 mmbbl 236 54

b Abu South West 2008 Feb-10 Oil Minimal Nil 245 50

c Padang 2006 2008 Oil 2 mmbbl Nil 234 54

Notes on PM318

i

ii

iii

4 AAKBNLP SKE (50%)


Petronas

Carigali

24-May-04 23-Mar-24 20 Producing Malay Basin, Offshore

Terengganu

245 59

a Abu 1991 May-07 Oil 250 70

b Abu Kecil 1991 2009 Oil 256 51

c Bubu 1992 N.A. N.A. 256 51

d North Lukut 1991 Apr-04 Oil 225 62

e Penara 1992 Apr-04 Oil 224 62

Notes on AAKBNLP

i

ii

iii

iv

v

The Abu field was a significant discovery which tested 12,406 bopd. The field is further offshore and to the north of the existing Esso Production Malaysia Inc's Guntong

et al infrastructure with its pipelines ashore to Kerteh. Development is via a fixed production platform and floating, storage and offloading vessel. Production started in

June 2007, six months later than planned due to bad weather and contractor problems. Crude oil from the Abu Complex is processed on the Abu-A platform before

flowing to the FSO Abu for storage and export. SAKP was awarded the demobilisation contract for the FSO Abu in September 2016, meaning that production has

stopped.

Bubu was the second discovery in 1992 within PM 8 made by Esso. Risk service contract was purportedly awarded to Vestigo Petroleum and SapuraKencana in August

2013, but this did not materialise.

Penara-1 encountered hydrocarbons between 1,550-2,350m. Three production tests flowed a combined rate of 7,400 bopd of 29-47 degree API oil.

The North Lukut and Penara-1 fields are about 20km apart. Crude oil from North Lukut and Penara fields flows to the FPSO Bunga Kertas for processing, storage, and

export. Each field has been developed with a minimum facilities wellhead platform tied back via rigid pipelines to a pipeline end manifold located on opposite sides of

an FPSO. Each of the two PLEMs is connected to the FPSO's submerged turret via two flexible risers (a 12" ID production riser and a 6" ID gas lift/injection riser) in a lazy-

S configuration. The FPSO has gas, oil and water separation facilities plus gas lift and injection systems. Produced water is discharged following treatment onboard the

FPSO; the gas is treated and compressed for re-injection, gas lift and fuel gas. Crude oil is stabilised and stored for offloading via tandem moored shuttle tankers.

Development at the Abu South West field is via tie-back to the FSO Abu on the Abu field. SAKP was awarded the demobilisation contract for FSO Abu in September

2016, meaning that production has stopped.

The Padang field was developed with Puteri field. Production is tied back to the FPSO Bunga Kertas on the Penara field.

3 mmbbl67 mmbbl

The Puteri discovery well encountered 61m of oil pay in 2005. One of two wells - Padang-1 (drilled to test separate fault blocks) - was completed in 2006, encountering

oil in another formation. Integrated development using existing production infrastructure at Penara (FPSO Bunga Kertas).

Development of the Abu Kecil field includes tie-in to the fixed platform and FSO on Abu field. SapuraKencana was awarded the demobilisation contract for the FSO Abu

in September 2016, implying that production has stopped.


16

Figure 9: SapuraKencana Energy Sarawak Inc


Oil and gas blocks

Associated fields


contract

End of PSC

contract


year

Start of

production

Primary

production

Recoverable 2P

reserves

Remaining 2P

reserves

Notes on

discovery

Location Distance

from shore

Water

depth

Area

% At 1/1/2017F km m sq m

Sarawak - held under SapuraKencana Energy Sarawak Inc

5 SK310 SKE (30%)


Diamond Energy (30%)

SKE 17-Jun-08 16-Jun-37 29 Preparing to

produce

Offshore Sarawak 80 76 4,452

a B15 Dec-10 4QCY17 Gas 0.2 tcf 258m gross gas

column

Less than 5km from the

B14 field

66 78

b B14 Apr-13 2024 Gas 2.0 tcf 549m gross gas

column

Less than 5km from the

B15 field

69 76

Notes on SK310

i

ii

In December 2010, the B15 gas field was discovered within the SK310 PSC area. Gas Initially In Place (GIIP) estimated at 300 bcf, of which recoverable reserves

estimated at 200 bcf, to be produced over a period of seven years.

Proposed central processing platform on B15 with a 35km x 16" gas pipeline to the B11 export line. The B15 gas field will deliver gas to the Malaysia Liquefied Natural

Gas (MLNG) complex in Bintulu, Sarawak. Upside exists in additional prospects. The field development plan was approved by Petronas in November 2015. First gas

expected 4Q17.

On 23 June 2016, Petronas as gas buyer and and the PSC contracts signed the SK310 Upstream Gas Sales Agreement in relation to the production of gas from the B15

gas field. B15 will be producing at a peak rate of 100 mmscfd over seven years.

In April 2013, a major gas discovery was announced in the B14 gas well in the SK310 block, with potential Gas Initially In Place (GIIP) volume estimated at 3 Tcf, of

which 2 Tcf is likely recoverable. The B14 gas well has high H2S content. The B14 well is located less than three miles from Newfield's first pinnacle reef gas discovery

B15.


17

Figure 10: SapuraKencana Energy Sarawak Inc – continued


Oil and gas blocks

Associated fields


contract

End of PSC

contract


year

Start of

production

Primary

production

Recoverable 2P

reserves

Remaining 2P

reserves

Notes on

discovery

Location Distance

from shore

Water

depth

Area

% At 1/1/2017F km m sq m

6 SK408 SKE (40%)


Sarawak Shell (30%)

SKE 12-Dec-12 11-Dec-39 27 Preparing to

produce

Central Luconia,

Offshore Sarawak

120-183 61-122 4,480

a Teja-1 2014 2025 Gas 219m gross gas

column

8km southeast of

Cilipadi field

119 85

b Gorek-1 2014 2018 Gas 235m gross gas

column

15km southeast of F23

gas field

130 84

c Legundi-1 2014 2025 Gas 139m gross gas

column

18km south of F23 gas

field

128 75

d Larak-1 2014 2018 Gas 333m gross gas

column

12km south of F6 gas

field

150 85

e Bakong-1 2014 2022 Gas 1.5 tcf 600m gross gas

column

?? 177 75

f Jerun-1 2015 2022 Gas 800m gross gas

column

5km north of the

Bakong gas field

177 85

g Jeremin-1 2015 2022 Gas 104m gross gas

column

15km west of the F9

gas field

183 90

Notes on SK408

i

ii

iii

iv

v

As at late-2013, SAKP noted that SK408 included 30 prospects, 24 of which are carbonate reef prospects. It is located within the highly prospective Central Luconia gas

province and commands a large acreage position.

On 31 May 2016, SAKP announced the discovery of gas in two wells in the SK408 block: the Jerun-1 and the Jeremin-1 wells. SAKP drilled three wells in Sep/Oct 2015 in

the SK408 block to target non-associated gas within the primary target Late Miocene Carbonate reservoirs.

Non-associated gas is a form of natural gas that is extracted from condensate and gas wells, whereas associated gas is a form of natural gas that is extracted from crude

oil wells.

Jerun-1 is a significant discovery located approximately 5km north of the 2014 Bakong gas discovery. Based on analysis of electric log, pressure and sample data Jerun-1

has an interpreted gross gas column of approximately 800m in the primary target reservoir and is 3 Tcf gas discovery. However, estimates may be revised upwards to 5

Tcf based on a 950m gross gas column.

Jeremin-1, located approximately 15km west of the F9 gas field encountered a 104m gross gas column. Jerun-1 and Jeremin-1 are estimated to contain 3 Tcf of gas

reserves.

Putat-1, located approximately 20km north of the Cili Padi gas field is confirmed as a dry hole.

These two wells, Jerun-1 and Jeremin-1 together with the earlier five discoveries within the SK408 block are close to existing infrastructure supplying gas to LNG

facilities at Bintulu, Sarawak.

On 29 August 2014, SAKP announced another gas discovery from Bakong-1, the fifth and final well in its 2014 drilling campaign within the SK408 Production Sharing

Contract (PSC) area. The well encountered a gross gas column in excess of 600m and doubled resources in the block to 3 tcf of gas in place. Bakong alone is reported to

hold gas in place of 1.5 tcf. Production from SK 408 expected to start in Q4 2018. Development details unknown but expected to include wellhead platforms and

pipelines. Gas from Teja-1, Gorek-1, Legundi-1, Larak-1 and Bakong-1 are expected to supply feedstock to the Petronas LNG Complex.

1.5 tcf

3.0 tcf

On 9 June 2014, SapuraKencana Energy (SKE) announced four significant gas discoveries in the SK408 Production Sharing Contract (PSC) area, offshore Sarawak,

Malaysia. All four wells have discovered non-associated natural gas within the primary target Late Miocene Carbonate reservoirs. These are the first four wells of a 10-

well commitment in the SK408 PSC.

The first well, Teja-1, located southeast of the Cili Padi gas field encountered 219 metres of gross column whilst the Gorek-1 discovery, southeast from F23 gas field

encountered a gross gas column of 235 metres.

The third well, Legundi-1, located south of F23 gas field was drilled in a down-flank location and encountered a 139 metres gross gas column, and the fourth well, Larak-

1, located south of F6 gas field, also drilled in a down-flank location encountered a gross gas column of 333 metres.

Gas discovered in SK408 is very 'sweet' with low H2S. As a result, it will be prioritised for development, since processing costs are lower and hence, breakeven costs are

lower.


18

Figure 11: SapuraKencana Energy Sarawak Inc – continued


Figure 12: SapuraKencana Energy Sabah Inc


Oil and gas blocks

Associated fields


contract

End of PSC

contract


year

Start of

production

Primary

production

Recoverable 2P

reserves

Remaining 2P

reserves

Notes on

discovery

Location Distance

from shore

Water

depth

Area

% At 1/1/2017F km m sq m

7 SK319 SKE (25%)

Sarawak Shell (50%)


Sarawak

Shell

28-Sep-12 Jun-39 27 Exploration Near Central Luconia,

Offshore Sarawak

120 91 2,650

Notes on SK319

i

ii In 2013, Sarawak Shell drilled five appraisal wells in SK319 block, which were reported to have encountered non-hydrocarbon bearing sands.

On 27 November 2012, Sarawak Shell took a 50% stake in the SK319 PSC in Central Luconia, offshore Sarawak. Sarawak Shell is the operator and will partner Petronas

Carigali with a 50:50 participating equity split. Shell will undertake an initial three-year exploration program to comprehensively explore an area totalling 2,727 square

kilometres within block SK319. On 20 December 2012, Newfield took a 25% interest in SK319, with Petronas Carigali reducing its participation to 25%.

Oil and gas blocks

Associated fields


contract

End of PSC

contract


year

Start of

production

Primary

production

Recoverable 2P

reserves

Remaining 2P

reserves

Notes on

discovery

Location Distance

from shore

Water

depth

Area

% At 1/1/2017F km m sq m

Sabah - held under SapuraKencana Energy Sabah Inc

8 SB331 SKE (70%)

M3nergy (10%)


SKE 20-Nov-14 19-Nov-41 27 Exploration 13,646

9 SB332 SKE (70%)

M3nergy (10%)


SKE 20-Nov-14 19-Nov-41 27 Exploration 17,933

Notes on SB331 and SB332

i

General notes

* The PSC contractors are entitled to recover costs expended on production of crude oil/natural gas ('cost oil' / 'cost gas') subject to the cost oil/cost gas limits of the PSC.

Unrecovered costs in any quarter can be carried forward for recovery against production in subsequent quarters. The PSC contractors are also entitled to a share of the

remaining portion of gross production after a certain contractual deduction, and cost oil/cost gas recovery as provided in the PSC. Under the terms of the PSC, Petronas

shall have the legal title to assets and equipment purchased for the purpose of petroleum operations, but with the contractors retaining the right of use of such assets

and equipment for the duration of the relevant contract.

Under the terms of the PSC signed on 20 November 2014, the PSC partners are committed to drill two wildcat wells and acquire 500 line kilometres of new 2D seismic

data in Block SB331, as well as to drill one wildcat well and acquire 100 line kilometres of new 2D seismic data in Block SB332. In addition, they will also carry out other

integrated studies based on existing data for the two blocks.


19

Figure 13: Exploration blocks which have been relinquished by SapuraKencana Energy


Oil and gas blocks

Associated fields


contract

End of PSC

contract


year

Start of

production

Primary

production

Recoverable 2P

reserves

Remaining 2P

reserves

Notes on

discovery

Location Distance

from shore

Water

depth

Area

% At 1/1/2017F km m sq m

1 Deepwater SK2C SKE (20%)

Murphy Sarawak (50%)


Mitsubishi Corp (10%)

Murphy

Sarawak

25-May-04 24-May-42 38 Exploration Near Northern

Luconia, Offshore

Sarawak

250-300 200-2,000 4,400

a Talang-1 2006 - Gas 280 1,140

b Paus-1 2009 ?? Gas ?? 100m gross gas

column

298 1,534

Notes on Deepwater SK2C

i

ii

iii

2 Tembungo New Oil SKE (50%)


SAKP 4-Jul-11 Apr-24 13 Exploration None Oil Sabah Basin, Offshore

Sabah

75

Notes on Tembungo

i

3 SB310 SKE (35%)

Repsol (35%)


SAKP 26-Oct-09 ?? Exploration 150 7,271

Notes on SB310

i

ii On 8 May 2015, Repsol took over Talisman’s assets in Malaysia. These assets included 70% interest in the SB310 exploratory block, of which 35% was transferred to

SAKP in 2015. The SB310 block was previously operated by SAKP, but has since been relinquished. During Jan-Feb 2016, SAKP employed jack-up rig, Naga 8, to drill

exploration wells Zoisit-1 and Baiduri-1 in the SB310 block.

Newfield originally signed a Joint Operating Agreement with Petronas Carigali on 25 May 2004 with a 60% interest in the Deepwater SK2C block, and Newfield was the

operator of Deepwater SK2C. On 16 February 2007, Newfield farmed out 20% interest to Mitsubishi Corp, hence reducing its interest to 40%. During 2015, SAKP further

reduced its interest in SK2C from 40% to 20%. Petronas also reduced its interest from 40% to 20%, while Mitsubishi reduced its interest from 20% to 10%. This allowed

Murphy Sarawak to take a 50% interest in SK2C. As such, SAKP ceded the role of operator of the block to Murphy Sarawak.

Non commercial discovery

The PSC was signed on 26 October 2009 for Block SB309 and SB310 together, wherein Talisman Malaysia took a 70% interest with Petronas Carigali taking the

remaining 30%. The PSC partners were required to acquired 1,300 sq km of new 3D seismic data and drill five wells to a minimum aggregate depth of 14,500 metres.

The minimum financial commitment for Block SB310 was estimated at US$117m. Talisman performed seismic studies in the SB310 block in late-2012 and early-2013.

As at late-2013, SAKP reported that Deepwater 2C includes more than 10 undrilled prospective reserves, and that Newfield was in the midst of assessing the

commercial reserves of the prospective field. Also in late-2013, Energy Quest reported that "earlier drilling in Deepwater Block C encountered one non-hydrocarbon

bearing well, Paus-North 1, and two marginal oil and gas discoveries at Paus-1 (2009) and Talang-1 (2006) wells".

The original Tembungo oilfield has been producing since 1974 under Esso Production Malaysia Inc (EPMI). Petronas took over operations from EPMI in December 1986.

The field has two platforms, A and B. On 4 July 2011, Newfield farmed into an existing PSC with Petronas, taking a 50% interest in Tembungo New Oil and Newfield is

also the operator of Tembungo New Oil. Newfield's interest and operatorship in the Tembungo block was limited to the New Oil and New Facilities, and SAKP bought

this over after the latter's acquisition of Newfield.

In late-2013, Energy Quest reported that in the Tembungo brownfield redevelopment, "recent unfavourable findings from the drilling results of the first commitment

well Keamaatan-1 within the field, has reduced the chance of success of the remaining identified infill drilling wells at the Tembungo field".

According to Clarksons, Talang-1 reached its total depth but only found 18m of non-commercial gas pay in 2006. In 2009, Paus-1 encountered a 100m gross gas column

in several high quality reservoir sands, but development is uncertain.


20

Figure 14: Berantai Risk Service Contract


Oil and gas blocks

Associated fields

Stake in RSC Operator Start of RSC

contract

End of RSC

contract


year

Start of

production

Primary

production

Recoverable 2P

reserves

Remaining 2P

reserves

Notes on

discovery

Location Distance

from shore

Water

depth

Area

% At 1/1/2017F km m sq m

Risk Service Contract - Berantai

1 Berantai RSC SKE (50%)

Petrofac (50%)

Petrofac Jan-11 Jul-16 5.5 Producing 1971 2012 Gas 20 mmbbl

214 mmscfd

Malay Basin, Offshore

Terengganu

180 64

Notes on Berantai

i

ii

iii On 11 July 2016, SAKP announced that it had reached mutual agreement with Petronas for the cessation of the Berantai RSC, together with their partner, Petrofac

Energy Developments Sdn Bhd. The cessation will be effective on 30 September 2016. Petronas will reimburse all outstanding capital and operational expenditures to

the RSC contractors by June 2017, and the ownership of Berantai FPSO will be transferred to Petronas. The remaining outstanding costs of the FPSO will form part of

the reimbursement by Petronas.

Berantai RSC is the first risk service contract in Malaysia, it obtain first gas on October 29, 2012. Oil and gas sent to FPSO from Berantai Platform-A.

In January 2011 a joint venture company comprising Petrofac (50%), Kencana (25%) and SapuraCrest (25%) were awarded a 9-year risk service contract (RSC) for the

field development plan. First gas was planned for 2Q 2012 with the first phase of 18 wells due to be completed by the end of the year, however this was delayed due to

late delivery of the FPSO. Gas processing began in October 2012 from the first three wells with an additional two wells added by the end of 2012 producing 80 mmcfd.

Petronas ended the RSC with licensees in July 2016 and appointed its subsidiary, Vestigo Petroleum as operator.


21

Figure 15: Possible development options for SapuraKencana Energy's gas fields


Block SKE's

share

Fields Total

field

gross gas

reserves

Technical

recoverable

reserves

Max

prod rate

Estimated

prod

start

Development concept Development requirements

Actual - for SK310 B15

Potential - for all other

fields

Development

capex

Unit

capex

cost

Unit

opex cost

Total

unit cost

bcf bcf mmboe mmscf mmbtu mmscfd US$ m

1 SK310 30% B15 300 200 10.3 58,074 59,699,724 32 3Q CY17 B15 is a tie-back development, whereby

the mini-CPP on B15 will be linked to the

B11 export line with a 35km x 16" gas

pipeline. Via B11, the B15 gas field is

linked to E11 hub via pipeline, and from

E11 hub, there is a trunk line to deliver

gas to the Malaysia Liquefied Natural

Gas (MLNG) complex in Bintulu,

Sarawak.

CPP: Yes

B15-B11 pipeline: 35 km

Total capex

estimated to be

US$300m, of

which SKE's

share is

US$90m.

1.51 0.50 2.01

2 SK310 30% B14 2,700 1,890 54.3 306,635 315,220,304 81 3Q CY24 As B14 is only three miles from B15, the

development will also likely be tied to the

B11 field and E11 hub. The B14 gas field

will need processing for its high hydrogen

sulfide (H2S) content.

CPP: Yes

H2S: Yes

B14-E11 pipeline: 35 km

Not finalised Not

finalised

Not

finalised

Not

finalised

3 SK408 40% Gorek-1

Larak-1

920 644

104

3Q CY18 Gas production from Gorek and Larak

can be exported to the CPP on F6 using

a pipeline, to ride on the pipeline between

F6 and E11 hub, and then the trunkline

from E11 hub to Bintulu LNG. May or

may not need to build a new CPP on

Gorek or Larak fields.

CPP: Maybe

Larak-F6 pipeline: 15 km

Gorek-F6 pipeline: 38 km

Not finalised Not

finalised

Not

finalised

Not

finalised

Bakong-1 1,500 1,050

Jerun-1

Jeremin-1

3,000 2,100

5 SK408 40% Teja-1

Legundi-1580 406 27

2Q CY25 Teja and Legundi fields are close to E11

hub, and may be able use the CPP on

E11. May or may not need to build a new

CPP on Teja or Legundi fields.

CPP: Maybe

Teja-E11 pipeline: 45 km

Legundi-E11 pipeline: 25 km

Not finalised Not

finalised

Not

finalised

Not

finalised

Not

finalised

Not

finalised

US$/mmbtu

171

4Q CY21 Due to the size of the Jerun, Jeremin and

Bakong fields, SKE will probably need to

build its own CPP in Jerun and/or

Bakong, and then send the gas to the F6

pipeline for onward export to the E11 hub.

CPP: Yes, located at Jerun

Jerun-F6 pipeline: 28 km

Jeremin-Jerun pipeline: 20 km

Bakong-Jerun pipeline: 8 km

Not finalised Not

finalised

Estimated SKE's share of net

entitlement

177.3 1,000,180 1,028,185,5254 SK408 40%


22

Figure 16: Close up of the gas fields at SK310 (B15 and B14) and SK408 (Gorek, Larak, Jerun, Jeremin, Bakong, Teja, and Legundi) – highlighted in light blue

SOURCES: CIMB RESEARCH, CLARKSONS


23

Figure 17: Location of SK310 and SK408 in relation to Bintulu LNG plant

SOURCES: CIMB RESEARCH, CLARKSONS

SK408

SK310


24

A note on SAKP’s energy disclosures

SAKP discloses its energy reserves in the form of a pie chart. These reserves are based on „2C‟ (best estimate of contingent resource) and „2P‟ (proven and probable reserves) estimates.

The Peninsular Malaysia oil blocks are 2P reserves.

SK310 B15 is a 2P reserve, because the gas sale agreement (GSA) has already been signed.

SK310 B14 is a 2C reserve because the GSA has not been signed.

The fields in SK408 are 2C reserves, for the same reason.

These reserves data are not to be read literally. Even though SAKP discloses that it has reserves of 13.2 mmbbl of oil, this does not mean that its equity share of actual physical production is that same number.

Figure 18: SKE’s energy reserves

SOURCES: COMPANY REPORTS

The reserves data are analogous to a Balance Sheet statement, which is calculated based on four main assumptions: (1) the oil price, (2) the production profile, (3) the required capex spend and (4) the opex spend. Other inputs include the royalty and production tax, petroleum income tax, expected abandonment costs and all other net cashflow items.

So, essentially the reserves data are SKE‟s share of net cashflows for the entire field life, expressed in terms of barrels of oil, based on a certain forward oil price curve.

These reserves figures are based on Net Entitlements only, meaning SKE‟s share of the residual US$ value of the barrels that remain to be produced from the field, after deducting estimated royalties, opex, capex, production tax and petroleum income tax, then translated back into barrel equivalents, at a certain assumed oil price curve.

If the oil price assumption used in the calculation of the reserves data is lowered, the reserves volume will also be lowered, even with zero production, because the net cashflows arising from the value of the future production have been reduced.


25

We believe the actual physical production of oil or gas from the fields will be significantly higher than that indicated by the reserves pie chart, for two reasons.

First, because the reserves pie chart is merely an expression of the net cashflows from the field (after deducting opex, capex, royalties and all manner of taxes) in terms of barrel equivalents.

Second, because the reserves pie chart is SKE‟s equity share of the net production entitlement, whereas the actual physical production is the gross entitlement to all PSC contractors.

SAKP‟s disclosure on the net production rate (expressed in terms of thousands of boe per day) and the net liftings (expressed in terms of mmboe), are also based on the concept of SKE‟s share of the net entitlements and share of net cashflows, and hence, also cannot be read literally to indicate the actual share of physical barrels produced, in our view.

Figure 19: SKE’s forecasted net production rate (000 boepd)

SOURCES: COMPANY REPORTS

Figure 20: SKE’s forecasted net liftings (mmboe) and crude lifting price (US$/bbl)

SOURCE: COMPANY REPORTS


26

Assumptions for SKE

We are assuming the Brent oil price to average US$52/bbl in FY18F and US$61/bbl in FY19F. These forecasts may be conservative in light of the recent decision by OPEC and non-OPEC nations to curtail global oil production by 1.8%. However, it is pertinent to note that the production cuts are for a period of six months only, between January and June 2017, at least initially. Also, global stockpiling has been so dramatic in the past three years, that it will take approximately 600 days to completely use up the inventories accumulated since 2014, in our view. Finally, US shale oil output is forecast to increase in 2017 by IEA, threatening to eat into the price impact that OPEC intends to achieve. We have a more detailed discussion on the production cuts in the appendix.

Our assumptions on SKE‟s net entitlement to oil and gas production are our best estimate based on disclosures made by SAKP.

In FY17F, we expect oil production to decline by 17% yoy to just 3.983 mmbbl, because of the natural production decline at the ageing Peninsular Malaysia fields. In FY18F, we forecast oil production to recover slightly to 4.053 mmbbl because of the seven-well production drilling campaign at PM323 from May 2017F onwards. But from FY19F onwards, the oil fields will enter into a steep decline, in our view.

We expect gas production at SK310 B15 to kick off from 4QCY17F, or FY18F, and will come to a close in FY24F.

The big prize, in our opinion, is when the SK408 fields begin production, starting with Gorek and Larak from FY19F, and then followed by Jerun, Jeremin and Bakong from FY23F.

By FY19F, we expect SKE to produce more gas than oil. At the peak in FY23F, we believe SKE may be entitled to net production of 19.398 mmboe, almost five times higher compared to the net production entitlement of 3.983 mmboe in the current financial year, as more fields come online.

Our financial model does not include production from the B14 field in SK310, because of the uncertainties revolving around the requirement for an expensive CPP to process the H2S and then to find suitable underground locations to sequester the H2S.

Figure 21: Key assumptions - Energy segment


FY15 FY16 FY17F FY18F FY19F FY20F FY21F FY22F FY23F FY24F

CY14 CY15 CY16F CY17F CY18F CY19F CY20F CY21F CY22F CY23F

Brent price (US$/bbl) 43.49 51.98 60.73 66.32 71.57 76.81 82.06 85.94

Wellhead gas price (US$/mmbtu) 3.24 3.76 4.11 4.40 4.70 4.99 5.25

SKE's net entitlement to energy

production (mmboe)

5.101 4.801 3.983 4.871 6.273 10.230 7.350 7.588 19.398 16.630

- Oil 5.101 4.801 3.983 4.053 3.038 1.457 0.273 0.000 0.000 0.000

- Gas from SK310 B15 0.000 0.000 0.000 0.818 2.074 2.078 1.726 1.636 1.642 0.319

- Gas from SK408 0.000 0.000 0.000 0.000 1.161 6.695 5.350 5.952 17.756 16.311

SKE's net entitlement to gas

produced (mmbtu)

4,743,198 18,762,085 50,883,107 41,044,804 44,010,304 112,508,771 96,451,366

- Gas from SK310 B15 4,743,198 12,027,826 12,050,826 10,013,700 9,489,085 9,525,737 1,849,353

- Gas from SK408 6,734,260 38,832,281 31,031,105 34,521,219 102,983,034 94,602,013

Assumed production rate - entire field (mmscfd) 122.1 240.0 365.8 295.7 314.3 770.8 916.9

- Gas from SK310 B15 122.1 106.9 107.1 89.0 84.3 84.6 16.4

- Gas from SK408 133.1 258.7 206.8 230.0 686.2 900.4


27

Figure 22: SKE's net entitlement to energy production (mmboe), and selling price of oil (US$/bbl)

SOURCES: CIMB, RIGLOGIX

Title:

Source:


1.7821.207 0.890 1.222 1.262 1.237 1.286 1.016 1.088 1.262

0.800

5.101 4.8013.983 4.053

3.038

0.8183.235

0

20

40

60

80

100

120

0

1

2

3

4

5

6

7

1Q FY15 2Q 3Q 4Q 1Q FY16 2Q 3Q 4Q 1Q FY17 2Q 3Q 4Q FY15 FY16 FY17F FY18F FY19F

Oil production (mmbbl) Gas production (mmboe) Selling price of oil (US$/bbl)


28

P&L forecasts for SKE

We are forecasting SKE to deliver a breakeven core PBT in FY17F, down from much better profits in previous years, as a result of the significant decline in oil prices. We think reported PAT in FY17F may benefit from a possible partial writeback of FY16‟s impairment charge on Oil & Gas Properties, given that oil prices have recovered somewhat.

In FY18F, we believe SKE should report a loss before tax, due to the absence of profits booked in by the Berantai RSC, as well as the absence of further share of profits from the 49%-owned Berantai FPSO JV. Although the Peninsular Malaysia oil blocks may not able to generate pretax profits in FY18F, we forecast the blocks to more than cover cash operating costs, as well as more than cover the interest expense allocated to them from the group-level borrowings. Therefore, the oil blocks are expected to remain cash-accretive.

From FY19F onwards, we forecast earnings improving significantly as a result of the first full year of SK310 B15 gas production, and because we have assumed higher crude oil prices.

Figure 23: SapuraKencana Energy P&L (RM m)




Revenue (RM m) 2,153.5 1,599.6 989.7 957.4 1,089.2 1,250.6 820.3 847.4 2,302.3 2,076.3

- Oil PSC 706.4 891.4 785.6 393.6 79.6 0.0 0.0 0.0

- Gas PSC 0.0 66.0 303.6 856.9 740.7 847.4 2,302.3 2,076.3

* SK310 B15 0.0 66.0 194.6 203.0 180.7 182.7 194.9 39.8

* SK408 0.0 0.0 109.0 654.0 560.0 664.7 2,107.4 2,036.5

* SK310 B14 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

- Berantai RSC 557.3 618.7 283.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Core EBITDA 1,247.4 706.6 480.6 569.8 676.3 955.3 615.1 583.5 1,577.5 1,375.7

- Oil PSC 370.6 522.2 425.5 206.3 40.4 0.0 0.0 0.0

- Gas PSC 0.0 47.6 250.8 749.1 574.7 583.5 1,577.5 1,375.7

* SK310 B15 0.0 47.6 168.0 177.5 157.8 133.0 141.9 20.9

* SK408 0.0 0.0 82.8 571.6 416.9 450.5 1,435.6 1,354.8

* SK310 B14 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

- Berantai RSC 266.6 110.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Core EBITDA margin (%) 57.9% 44.2% 48.6% 59.5% 62.1% 76.4% 75.0% 68.9% 68.5% 66.3%

Depreciation/amortisation -542.5 -455.9 -342.1 -395.4 -404.2 -391.2 -243.4 -240.5 -595.2 -482.3

Core EBIT 705.0 250.7 138.5 174.4 272.2 564.2 371.8 343.0 982.2 893.4

Core EBIT margin (%) 32.7% 15.7% 14.0% 18.2% 25.0% 45.1% 45.3% 40.5% 42.7% 43.0%

Net interest exp & other income -182.4 -181.7 -181.6 -180.2 -182.9 -174.0 -172.2 -170.8 -166.2 -138.7

Associates / JVs 104.0 47.0 44.5 -10.0 -10.0 0.0 0.0 0.0 0.0 0.0

- Berantai FPSO - 49% 103.8 81.8 54.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0

- Labuan Shipyard - 50% 0.2 -34.8 -10.0 -10.0 -10.0 0.0 0.0 0.0 0.0 0.0

Core PBT 626.6 116.1 1.4 -15.8 79.2 390.1 199.6 172.2 816.0 754.7

Core PBT margin (%) 29.1% 7.3% 0.1% -1.7% 7.3% 31.2% 24.3% 20.3% 35.4% 36.3%

Exceptionals -54.9 -1,569.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Reported PBT 571.6 -1,453.7 1.4 -15.8 79.2 390.1 199.6 172.2 816.0 754.7

Petroleum income tax @ 38% 0.0 -12.0 -40.1 -152.1 -79.6 -85.7 -355.7 -90.2

PAT 1.4 -27.8 39.1 238.1 119.9 86.6 460.3 664.5


29

DRILLING BUSINESS

A long history of drilling operations

SAKP has a long history operating tender drilling rigs, with SapuraCrest and Kencana Petroleum involved in this business prior to their merger.

SapuraCrest’s drilling business

Prior to the merger, SapuraCrest had a partnership with Smedvig of Norway between 1991 and 2006. Seadrill, also of Norway, acquired Smedvig in January 2006, after which SapuraCrest had a very strong partnership with Seadrill.

Seadrill not only operated a fleet of tender drilling rigs in a 49:51 partnership with SapuraCrest but also became a major shareholder in SapuraCrest through private placement and also by buying shares in the open market. Prior to the merger of SapuraCrest and Kencana Petroleum on 17 May 2012, Seadrill owned as much as 24.3% equity stake in SapuraCrest.

When CIMB first initiated coverage on SapuraCrest in 2009, the drilling JV with Seadrill owned five tender drilling barges – T-3, T-6, T-9, T-10 and Teknik Berkat. At that time, the JV was the largest local owner-operator of tender drilling rigs and, hence, we estimate it probably had 40% market share of the tender drilling requirements in Malaysia. The drilling operations were also a significant portion of SapuraCrest‟s earnings – comprising 66% of its pretax profits in FY1/09.

Kencana Petroleum’s drilling business

Separately, Kencana Petroleum also ventured into the drilling space prior to the formation of SAKP. Back in September 2007, it entered into a JV with Mermaid Drilling, a subsidiary of Mermaid Maritime Pcl (MMT) that was later that same year listed on the Singapore Exchange. The agreement at that time was for Kencana to own a 25% stake in the rig-owning company and a 60% stake in the rig operator, with MMT owning the rest. Kencana needed to own a majority stake in the rig-operating company so as to meet local ownership requirements when bidding for Petronas contracts. At the time of the signing of the JV deal, MMT already owned and operated two aging tender drilling rigs – the MTR-1 and MTR-2.

Kencana Petroleum began fabrication work for the JV‟s first tender drilling rig in late-2007 at a price of US$136m. This rig was later named KM-1 and was completed in late-2009. It began its five-year charter to Petronas Carigali at US$130,000/day in September 2010. In early-2009, Kencana Petroleum began to construct a second rig, KM-2, on a speculative basis and on its own book but fabrication work was suspended in late-2009 as tenders by Petronas for drilling work became scarce in the aftermath of the Global Financial Crisis.

In mid-2010, Kencana Petroleum proposed to buy over MMT‟s 75% stake in the rig-owning company and its 40% stake in the rig operator for US$66.6m. After the completion of this transaction, Kencana Petroleum had a 100% stake in KM-1.

From 2012 onwards, Lumut fabrication yard – then under the newly-formed SAKP – continued with the construction of KM-2 as well as began simultaneously constructing KM-3 at a cost of US$145m each.


30

The acquisition of Seadrill’s tender drilling rig assets

On 5 November 2012, SAKP entered into a Memorandum of Understanding with Seadrill Tender Rig Ltd to acquire 100% of the latter's tender and semi-tender drilling rig business.

Seadrill wanted to sell the tender rig business in order to focus on deepwater drillship and semi-submersible drilling rigs. The transaction was friendly as both were willing parties.

The acquisition also included Seadrill's 49% JV interest in Varia Perdana Sdn Bhd, 49% JV interest in Tioman Drilling Company Sdn Bhd as well as Crest Tender Rigs Pte Ltd (which is wholly-owned by Varia Perdana Sdn Bhd). Varia Perdana, via Crest Tender Rigs, wholly owned five tender drilling rigs in a JV with SAKP, which owned the remaining 51% interest in the JV.

The tender drilling rigs that were part of the transaction included Seadrill's 10 wholly-owned rigs (T-4, T-7, T-11, T-12, West Alliance, West Pelaut, West Menang, West Setia, West Jaya, West Berani) and three wholly-owned newbuildings (T-17, T-18, West Esperanza). Also included were Seadrill's 49% interest in the JV with SAKP, which owned five rigs (T-3, T-6, T-9, T-10, Teknik Berkat).

At the time of the transaction, SAKP's existing fleet of tenders included the KM-1 and two newbuildings (one tender barge to be named KM-2 and one semi-tender to be named KM-3), on top of 51% interest in the JV with Seadrill, which owned five rigs (T-3, T-6, T-9, T-10, Teknik Berkat). Subsequent to the completion of the acquisition, KM-1 was renamed T-19, KM-2 was renamed T-20 and KM-3 was renamed Kinabalu.

SAKP also entered into an agreement with Seadrill to manage three rigs (T-15, T-16, West Vencedor) subject to consent by the charterers of those rigs. These three rigs were excluded from the transaction and were owned/planned to be owned by Seadrill Partners LLC, a 59.5% subsidiary of Seadrill, which was a Master Limited Partnership (MLP) structure in the US.

In the end, SAKP entered into a 5-year, no-competition agreement with Seadrill, whereby SAKP managed T-15 and T-16 on behalf of Seadrill and was the primary vehicle for Seadrill‟s tender drilling rig operations.

At the time of the initial acquisition announcement, SAKP said that it will "decide on the plan and future usage of T-3, T-4, T-6 and T-7 immediately after the completion of the acquisition”. T-3 and T-4 were ultimately sold in September 2015 for use as an accommodation unit while T-6 and T-7 were sold in November 2015 for scrap.

The description above fully accounts for SAKP‟s present fleet of 16 tender drilling rigs, as set out in the table below.


31

Figure 24: SapuraKencana's tender drilling rig assets


The Seadrill acquisition purchase consideration and financing

The initial enterprise value of the Seadrill acquisition was agreed at US$2.9bn, to be adjusted prior to the closing of the transaction by deducting external debt, capex commitments, inter-company payables, the price for PT Nordrill Indonesia of US$2.4m and a certain 'price adjustment', and also adding estimated cash and inter-company receivables.

The consideration was to be settled via:

(i) US$350m via the issue of ordinary shares (400.8m shares at RM2.70/share),

(ii) US$238m via the issue of redeemable exchangeable preference shares (272.5m three-year REPS at RM2.70 conversion price),

(iii) US$187m in maximum deferred consideration that was payable three years after the closing of the transaction,

(iv) cash payment for the balance.

The issue of 400.8m shares by SAKP to Seadrill Limited as part consideration for the acquisition of the latter's tender drilling rig business raised its shareholdings in SAKP from 319.5m shares (6.39% stake) to 720.3m shares (12.02% stake), including the dilutive effects of the private placement of new ordinary shares. The shares issued to Seadrill were subject to a moratorium on transfer/sale for 12 months after the closing of the transaction.

SAKP later decided not to proceed with the REPS issue.

On 3 April 2013, SAKP announced that it will execute a private placement of 587m new shares at RM2.80/share, raising proceeds of RM1,643.6m. Of the

Name of rig Type of rig Date yard

order

signed

Delivery

date

End of life Age Rated

water

depth

Water

depth

with pre-

laid

mooring

Rated

drilling

depth

Lifting

capacity

Accommo

dation

Shipyard

years ft ft ft tonnes pax

Existing fleet

1 SKD T-9 Tender barge Jan-03 Apr-04 Mar-34 12 30' to 800' 6,000' 30,000' 200 140 MMHE, Malaysia

2 SKD T-10 Tender barge Jan-06 Aug-07 Jul-37 9 30' to 800' 6,000' 30,000' 200 150 MMHE, Malaysia

3 SKD T-11 Tender barge Jun-06 Mar-08 Feb-38 8 30' to 800' 6,000' 30,000' 200 157 MMHE, Malaysia

4 SKD T-12 Tender barge Feb-08 Feb-10 Jan-40 6 30' to 800' 6,000' 30,000' 200 160 MMHE, Malaysia

5 SKD T-17 Tender barge Apr-11 Jun-13 May-43 3 30' to 800' 6,000' 20,000' 250 160 Cosco Nantong

6 SKD T-18 Tender barge Apr-12 Mar-14 Feb-44 2 30' to 800' 6,000' 20,000' 250 160 Cosco Nantong

7 SKD T-19 Tender barge Oct-07 Aug-10 Jul-40 6 39' to 800' 6,000' 25,000' 300 145 Kencana HL, Malaysia

8 SKD T-20 Tender barge Aug-11 Sep-14 Aug-44 2 39' to 800' 6,000' 20,000' 400 145 Kencana HL, Malaysia

9 SKD Teknik Berkat Tender barge 1989 1990 2020 26 35' to 400' - 16,400' 95 128 Pan United Shipyard,

Singapore

10 SKD Jaya Semi-tender Jun-08 Mar-11 Feb-41 5 32' to 800' 6,000' 30,000' 250 160 KeppelFELS, Singapore

11 SKD Alliance Semi-tender Jun-00 Sep-01 Aug-31 15 32' to 800' 6,000' 30,000' 175 140 KeppelFELS, Singapore

12 SKD Setia Semi-tender Apr-04 Aug-05 Jul-35 11 32' to 800' 6,000' 30,000' 200 140 KeppelFELS, Singapore

13 SKD Pelaut Semi-tender Apr-93 Mar-94 Feb-24 22 30' to 800' 6,000' 30,000' 200 130 Far East Levingston

Shipyard, Singapore

14 SKD Berani Semi-tender May-05 Dec-06 Nov-36 10 32' to 800' 6,000' 30,000' 200 140 KeppelFELS, Singapore

15 SKD Menang Semi-tender Jan-98 Mar-99 Feb-29 17 30' to 800' 6,000' 30,000' 150 140 KeppelFELS, Singapore

16 SKD Esperanza Semi-tender Jun-11 Apr-13 Mar-43 3 32' to 800' 6,000' 30,000' 250 160 KeppelFELS, Singapore

Newbuildings

1 SKD Kinabalu Semi-tender Aug-11 Jul-20 Jun-50 32' to 800' 6,000' 25,000' 250 160 Kencana HL /

KeppelFELS

2 SKD Raiqa Semi-tender Aug-15 2020 2050 32' to 800' 6,500' 25,000' 250 160 KeppelFELS, Singapore


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proceeds, RM1,524.2m will be used as cash consideration for the Seadrill acquisition while the remaining RM119.4m will be used to defray expenses relating to the placement.

The acquisition of Seadrill‟s tender drilling rig business was deemed completed on 30 April 2013 and SAKP booked goodwill amounting to RM2.1bn in its FY14 accounts.

On 16 August 2013, SapuraKencana Drilling Pte Ltd and Seadrill agreed on the final equity valuation of Seadrill's tender drilling rigs business at US$2,555m. US$350m was settled via the issue of 400.8m new SAKP shares at RM2.70/share, US$187m via deferred consideration and US$2,018m via the payment of cash. A portion of the cash consideration was financed by the private placement, with the rest refinanced via a US$ multi-currency debt issue in March 2014. The deferred consideration was settled by SAKP in FY16F.

Pricing rationale

According to SAKP, the pricing of the deal was based on the expected cashflow from the rigs up to their useful life of 30 years, based on assumptions of long-term day rates ranging between US$120,000 and US$200,000 and average long-term utilisation rates of 95%.

However, drilling day rates and utilisation levels in the post-2014 oil price downturn period have significantly underperformed these long-term assumptions.

SAKP impaired RM401m worth of its drilling PPE (property, plant and equipment) in FY16, accounting for a mere 4% of its pre-impairment net book value but left the goodwill portion untouched. We will discuss the issue of goodwill impairment in the Valuation and Recommendation section.

Commercial benefits of the Seadrill acquisition

The merger between SapuraCrest and Kencana Petroleum, followed by the acquisition of Seadrill, put 16 tender drilling rigs at SAKP‟s disposal together with six newbuildings. Subsequently, four aged rigs were sold and four newbuildings were delivered, keeping the fleet stable at 16-strong.

With 16 tender drilling rigs in its fleet, SAKP owns 50% of the 32 tender drilling rigs in existence today, giving it a very strong market presence in this niche drilling segment. In addition, SAKP manages Seadrill‟s T-15 and T-16 on the latter‟s behalf, giving it even greater heft. Excluding Seadrill, the second-largest player in the tender drilling rig market is Atlantica Tender Drilling, which operates three rigs only.

SapuraCrest‟s 51:49 JV with Seadrill that owned five tender drilling rigs and Kencana Petroleum‟s single KM-1 rig essentially focused on the Malaysian drilling market whereas Seadrill‟s rigs were working around the world. Hence, the acquisition of Seadrill‟s tender drilling business helped SAKP to diversify its geographic exposure to outside Malaysia.

Finally, SAKP was operating and owning only shallow water tender barges prior to the acquisition but gained a fleet of seven semi-tenders pursuant to the acquisition, which allowed it to offer its rigs to deepwater developments.

The combined drilling business is now parked under SapuraKencana Drilling Holdings Limited (SKD).


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Future fleet development

Teknik Berkat likely to be scrapped

Teknik Berkat was originally built in 1982 but was refurbished in 1990. The rig is now 26 years old from the latter date and completed its last contract in May 2014. We believe it is likely to be eventually scrapped as its technical capabilities are now obsolete. SAKP has fully written off this rig.

Two newbuilding assets

The hull of SKD Kinabalu, a semi-tender rig that was the original KM-3, was fabricated at SAKP‟s Lumut yard and is now with Keppel FELS Shipyard for topside fit-out works. The percentage of completion is more than 50%, with the delivery of the rig deferred to July 2020.

SKD Raiqa, also a semi-tender rig, was contracted with Keppel FELS Shipyard in August 2015. Delivery was originally scheduled for May 2018 but has also been deferred to 2020. SKD Raiqa was specifically designed by SAKP to establish a new benchmark in semi-tender technical capabilities.

The delivery of these two rigs in FY21F will increase SAKP‟s tender drilling rig fleet to 17-strong, after factoring in the likely scrapping of Teknik Berkat.

The role of tender drilling rigs in the E&P value chain

A mix of both shallow water and deepwater drilling capabilities

Tender drilling barges are essentially flat-bottomed barges that are typically used in shallow water drilling whereas semi-tenders have four pontoons (or „legs‟) that are partially submerged into the ocean to provide greater stability for deepwater drilling. So SKD can offer their assets for both shallow water and deepwater drilling.

For instance, semi-tender SKD Menang was employed by Murphy Oil for drilling in the Kikeh field in 2013-14 at water depths of 1,300m. Drilling was done in conjunction with a SPAR platform.

Meanwhile, semi-tender SKD Esperanza was employed by Shell for drilling in the Malikai field from August 2016 at water depths of 560m. Drilling was done in conjunction with a tension leg wellhead platform.

For use in calm waters only

In both cases of tender barges and semi-tenders, they can only work in calm waters because, in harsh sea conditions, the tender rigs may move up and down significantly with the sea currents and may damage the platform to which they are hooked.

As tender barges are flat bottomed, they will not be as stable as ship-shaped structures in harsh environments. During storms, both tender barges and semi-tenders will need to unhook from the production platforms and from the pre-laid mooring systems so that they can be towed away because they will wobble during storms and run the risk of colliding with live production platforms.

For drilling in harsh environments, field operators have to use other types of assets, e.g. semi-submersible drilling rigs with dynamic positioning systems.


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Assets for development and production drilling

Tender rigs cannot be used for exploration drilling but only for development or production drilling. Development drilling involves the drilling of the first well once facilities are in place to commence production. Production drilling is taken to mean drilling activity to increase production from a field that is already producing from several wells drilled previously. In this report, the terms „development drilling‟ and „production drilling‟ are used interchangeably. This is distinct from exploration drilling, where wells are drilled in an effort to discover oil and gas reserves.

Exploration drilling needs jack-up rigs, which can be anchored on the seabed, or drillships, which can be dynamically and independently positioned. However, tender rigs move according to the sea currents and need to be anchored to the production platform first before the drilling derrick is transferred onto the production platform and the auxiliary equipment (which remains on the tender rig) is hooked up to the drilling derrick on the platform. As tender drilling rigs need to work in conjunction with production platforms, they can only be used for development or production drilling.

We believe this is one of the reasons why SKD has a preference for tender rigs – it allows the company to stay away from the exploration side of value chain. Exploration is a discretionary activity that can at times be sacrificed in a low oil price environment, which we are facing since late-2014, since oilfield operators are unlikely to be able to generate immediate cash returns from a newly-discovered well (since the field needs to be developed first). Of course, exploration drilling will still need to be done ultimately, otherwise the total oil reserves will start to dwindle.

Conversely, production drilling will likely continue even in a low oil price environment, albeit at a reduced scale. This is necessary to maximise recoverable reserves, as oilfield and well pressure (that pushes the oil upwards) decreases inexorably with time.

How much oil and gas are recovered from a field depends on how the oilfield operator manages its reserves – this is called reservoir management. The pressure of the oilfield decreases once the well is drilled and will continue to deplete over time even if no oil is recovered during that period. Over time, the pressure depletes to a level where no oil can be recovered any longer. So, operators need to take advantage of the available pressure in the reservoir to maximise production. This is why production drilling needs to continue even in a low oil price environment. If the decision to drill is made too late, it may not make any economic sense to drill anymore since the pressure is depleted and the oil can no longer be recovered.

Another reason why development or production drilling is required, in our view, is because oilfield reserves are not contiguous; different fields are separated by faults so oilfield operators have to drill more than one well in order to tap all the fields (e.g. in-field drilling, horizontal wells). All the drilled wells are then linked to a single platform, e.g. eight or 12 wells per production platform. This is especially important for oil blocks. For gas blocks, the gas is generally contained in a single „container‟, e.g. the SK310 B15 field is effectively a single-well development.


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Enabling smaller, cheaper platforms to be fabricated

Tender drilling barges and semi-tenders host the drilling derrick as well as all the auxiliary equipment required to support the drilling activity, e.g. water pumps, mud pumps, compressors, separators, accommodation units, etc. In preparation for drilling, the drilling derrick is transferred from the tender rig onto the production platform while the auxiliary equipment remains on the tender rig.

Typically, oilfield operators will decide on which type of drilling rig to use during the development phase of the oilfield.

So, for instance, if an oilfield operator wanted to use a jack-up rig, the production platform will need to be bigger as the production platform will have to host all the auxiliary equipment (which occupies a lot more space) as the jack-up rig only hosts the drilling derrick. The drilling derrick takes up less space than the ancillary equipment. As such, the production platform will usually be more expensive to construct and the oilfield operator will also have to own all the auxiliary equipment to support the drilling activity.

Conversely, if an oilfield operator planned for the use of tender barges or semi-tenders for a specific development, the production platform can be smaller. We believe tender drilling rigs are attractive for oilfield operators because they can move capex to the rig owner since the production platform specifically designed for the use of tender drilling rigs can be smaller. All the drilling auxiliary equipment can be on the tender rig.

Tender drilling rigs also have the added benefit of accommodating 140-160 personnel, which is more space for accommodation than jack-up rigs‟ 120-130 people. When jack-up rigs are used, some crew may have to stay on the production platform.


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Figure 25: Key events for SapuraKencana Drilling (SKD)



17-Oct-12 On 17 October 2012, SAKP announced that 51% subsidiary Tioman Drilling Company Sdn Bhd had secured a three-month extension of the charter for T-6

from Carigali PTTEPI Operating Company Sdn Bhd (CPOC) and Carigali-Hess Operating Company Sdn Bhd. The T-6 Contract was for an initial duration of

28 months commencing from 21 December 2010, with two optional extensions of three months each. Tioman Drilling has, on 8 October 2012, received

confirmation that CPOC has agreed to extend the T-6 contract for a further duration of three months commencing from 21 April 2013 until 20 July 2013,

valued at approximately US$9.2m.

5-Nov-12 On 5 November 2012, SAKP entered into a Memorandum of Understanding with Seadrill Tender Rig Ltd to acquire the latter's tender and semi-tender

drilling rig business.

8 & 13-Feb-13 On 8 and 13 February 2013, SAKP entered into an S&P agreement with Seadrill Limited for the proposed combination and integration of the respective

tender rig businesses of both SAKP and Seadrill . This involved acquiring Seadrill Limited's 100% interest in Seadrill Tender Rig Ltd and 99% interest in

PT Nordrill Indonesia (PTNI).

The acquisition also includes Seadrill's 49% JV interest in Varia Perdana Sdn Bhd, 49% JV interest in Tioman Drilling Company Sdn Bhd, as well as Crest

Tender Rigs Pte Ltd (which is wholly-owned by Varia Perdana Sdn Bhd). Varia Perdana, via Crest Tender Rigs, wholly owns five tender drilling rigs. SAKP

owns the remaining 51% interest in this JV.

At the same time, SAKP also proposed a base placement of shares to raise US$250m, and a proposed additional placement of up to 300m new SAKP

shares.

The initial enterprise value was agreed at US$2.9bn, to be adjusted prior to the closing of the transaction, by deducting external debt, capex

commitments, inter-company payables, the price for PTNI at US$2.4m, and a certain 'price adjustment', and adding estimated cash and inter-company

receivables.

The consideration was to be settled via:

(i) US$350m via the issue of ordinary shares (400,788,889 shares at RM2.70/share),

(ii) US$238m via the issue of Redeemable Exchangeable Preference Shares (272,536,444 three-year REPS at RM2.70 conversion price),

(iii) US$187m in maximum deferred consideration that is payable three years after the closing of the transaction,

(iv) With the remaining to be settled via cash payment.

The deferred cash payment consisted of a fixed deferred cash payment of US$145m, and a contingent cash payment of up to US$42m subject to the

extension/renewal of the West Esperanza and West Jaya drilling contracts (for a period of at least three years), on/before the third anniversary of the closing

of the transaction.

The pricing of the transaction was based on the DCF of the expected cashflow of the acquired assets for up to the useful life of the tender rigs of 30 years,

with assumptions on long-term day rates ranging between US$120,000/day to US$200,000/day, and average long-term utilisation rates of 95%.

The net assets of the acquiree companies as at 31 December 2012 was RM1,899m, with RM4,512.9m in expected goodwill to be recognised.

The issue of 400,788,889 shares to Seadrill Limited as part consideration for the acquisition of the latter's tender drilling rig business would raise its

shareholdings in SAKP from 319,540,802 shares (6.39% stake) to 720,329,691 shares (12.02% stake), including the dilutive effects of the proposed private

placement of new ordinary shares. The shares issued to Seadrill will be subject to a morotorium on transfer/sale for 12 months after the closing of the

transaction.

SAKP subsequently announced that it will no longer issue the Redeemable Exchangeable Preference Shares, but will instead increase the cash portion of

the consideration to be paid to Seadrill Limited.

The tender drilling rigs that will be part of the transaction include Seadrill's 10 wholly-owned rigs (T-4, T-7, T-11, T-12, West Alliance, West Pelaut, West

Menang, West Setia, West Jaya, West Berani), and three wholly-owned newbuildings (T-17, T-18, West Esperanza). Also included are Seadrill's 49%

interest in the JV with SAKP, which owns five rigs (T-3, T-6, T-9, T-10, Teknik Berkat).

At the time of the transaction, SAKP's existing fleet of tenders included the KM-1 and two newbuildings (one tender barge to be named KM-2, and one semi-

tender to be named KM-3), on top of 51% interest in the JV with Seadrill which owns five rigs (T-3, T-6, T-9, T-10, Teknik Berkat). Subsequent to the

transaction, KM-1 was renamed T-19, KM-2 was renamed T-20, and KM-3 was renamed Kinabalu.

SAKP also entered into an agreement with Seadrill to manage three rigs (T-15, T-16, West Vencedor) subject to consent by the charterers of those rigs.

These three rigs are excluded from the transaction, and are owned/planned to be owned by Seadrill Partners LLC, a 59.5% subsidiary of Seadrill.

SAKP will endeavour to enter into a JV with Archer Limited (39.9% owned associate of Seadrill Limited), to introduce Archer's wireline services in the Asian

markets, as well as to give Archer first right of refusal to acquire T-4 and T-7 for use as service facilities should SAKP decide to dispose of those rigs within

five years.

SAKP will "decide on the plan and future usage of T-3, T-4, T-6, and T-7 immediately after the completion of the acquisition, which may include a potential

arrangement with Archer for T-4 and T-7 as the contracts for the said rigs will expire by 2013/14".

15-Mar-13 On 15 March 2013, SAKP announced that Tioman Drilling on 6 March 2013 accepted the second extension for the T-6 contract for a further duration of three

months commencing from 21 July 2013 (expiry of 1st extension) until 20th October 2013. The second contract extension is valued at approximately

US$9.3m. The T-6 Contract was for an initial duration of 28 months commencing from 21 December 2010 until 20 April 2013 and was subsequently extended

until 20 July 2013.

3-Apr-13 On 3 April 2013, SAKP announced that it will execute a private placement of 587m new shares at RM2.80/share , raising proceeds of RM1,643.6m. Of

the proceeds, RM1,524.2m will be used as cash consideration for the Seadrill acquisition, while the remaining RM119.4m will be used to defray

expenses relating to the placement.

30-Apr-13 On 30 April 2013, SAKP and Seadrill agreed to an initial equity valuation of the acquisition at US$2,526.1m (after making the required adjustments from

US$2.9bn enterprise value). After the closing of the transaction, the initial price will be adjusted further on the basis as set out in the SPA to arrive at the final

price.

Of the initial equity valuation of Seadrill's tender drilling rig business, US$350m will be settled via the issue of 400.8m new SAKP shares at RM2.70/share,

US$187m via deferred consideration, and US$1,989.1m via the payment of cash.


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Figure 26: Key events for SapuraKencana Drilling (SKD) - continued



28-May-13 On 28 May 2013, SAKP announced that SapuraKencana Drilling (SKD) had taken delivery of a new rig, named T-17, was built at the Cosco Shipyard

located in Nantong, China. The naming ceremony was held on 22 May 2013. The T-17 is designed for offshore oil and gas development drilling of depths up

to 20,000 feet in up to 6,000 feet water depth. It will be mobilised to work in the Gulf of Thailand with long-time SKD client PTTEP of Thailand as

replacement for an older vessel, the T-3.

"SKD is now the main player in the worldwide tender rig business with 21 tender rigs of which 13 are tender barges and 8 are semi-tenders," said Dato' Seri

Shahril.

SKD became a fully owned entity of Sapurakencana Petroleum following its acquisition of London-based Seadrill's entire tender rig business for US$2.85bn

in May 2013.

The new T-17 will soon be joined in service by another newbuild, the semi-tender rig Esperanza that was recently built by Keppel FELS in Singapore. The

Esperanza is designed for deepwater offshore oil and gas development drilling of depths up to 30,000 feet in up to 6,500 feet water depth. The rig features

cutting edge drilling and well control equipment, with drilling capabilities comparable with much larger and more expensive semi-submersibles and drill

ships. It will be dry-towed out of Singapore in June to go to work for Hess Corporation in Equatorial Guinea on the Operator's "Okume-E" TLP for an 18

month contract.

12-Jul-13 On 12 July 2013, wholly-owned Crest Tender Rigs Pte Ltd was awarded a contract for the provision of Tender Assist Rig Services for SKD T-9 by PTTEP

International Limited. PTTEPI intend to use SKD T-9 for its Zawtika development drilling campaign offshore Myanmar. The T-9 contract will be commencing

in July 2013, the initial operational period is approximately 300 days. The total T-9 contract value is expected to be US$40m.

16-Aug-13 On 16 August 2013, SapuraKencana Drilling Pte Ltd and Seadrill agreed on the final equity valuation of Seadrill's tender drilling rigs business at

US$2,555m. US$350m was settled via the the issue of 400.8m new SAKP shares at RM2.70/share, US$187m via deferred consideration, and US$2,018m

via the payment of cash.

1-Apr-14 On 1 April 2014, SapuraKencana Drilling announced that it had won a new contract and three contract extensions worth a total of US$454m from new and

existing blue chip clients in West Africa (Congo and Angola), Brunei and Thailand.

i. The new contract in Congo, worth US$108m (US$295,890/day) was awarded by Total E&P Congo for the charter of SKD Berani for one year, with an

option for an extension of another year. Total Congo contracted SKD Berani for its work over and development drilling campaign offshore Congo. This

contract commences in April 2014 and lasts until March 2015.

ii. In Angola, SapuraKencana Drilling accepted a US$164m (US$224,658/day) two-year contract extension from Cabinda Gulf Oil Company Limited (or

Chevron Angola) for the provision of SKD Setia to be used for development drilling campaigns offshore Cabinda, Angola. The contract extension is for a

period of two years commencing in August 2014 and lasting until July 2016.

iii. In Thailand, SapuraKencana Drilling also accepted a contract extension worth US$90m (US$123,288/day) for a period of two years with Chevron Thailand

Exploration and Production Limited, for the provision of SKD T-12 for development drilling in the Gulf of Thailand. The contract extension with Chevron

Thailand is for a period of two years commencing in March 2014 and lasting until March 2016.

iv. In Brunei, SapuraKencana Drilling has accepted a two-year contract extension valued at US$92m (US$126,027/day) with Brunei Shell Petroleum Co Sdn

Berhad (Brunei Shell) for the provision of an offshore drilling rig and services by SKD Pelaut. The contract extension is for two years, commencing in April

2015 and lasting until March 2017. The SKD Pelaut will continue to be used for development drilling campaigns offshore Brunei.

16-May-14 On 16 May 2014, SAKP announced that SapuraKencana Drilling Holdings Limited, has been awarded a contract for the provision of offshore drilling rig and

services by SKD T-20 by CNR International (Côte d'Ivoire) S.A.R.L. The CNRI Contract comprises the provision of SKD T-20 for wells in the Espoir Field in

Block CI-26 offshore Côte d'Ivoire. The drilling programme includes drilling, side-tracking, completion and other associated works, where applicable. The

CNRI Contract is for a primary term of 10 firm wells to be completed in not less than 365 days, followed by four single well options to be exercised at CNRI‟s

sole discretion.

16-Jun-14 On 16 June 2014, SAKP announced that SapuraKencana Drilling won three new contracts and a contract extension for offshore work in Malaysia and

Thailand worth a total of approximately US$700m (RM2.3bn).

i. Two new contracts were awarded to the Group's wholly-owned subsidiary, Petcon (Malaysia) Sdn Bhd, by Petronas Carigali Sdn Bhd for the provision of

its two tender assist drilling rigs, SKD T-9 and SKD-T-10, for development drilling campaigns offshore Malaysia.

The SKD T-9 contract is for 5 years with an option to extend a further 2 years and will become effective from July 2014-June 2019. The SKD-T-10 contract

will be for 3 years with an option to extend for 2 more years and be effective from August 2014 to July 2017.

ii. The third new contract was awarded to the Group's wholly-owned SapuraKencana Drilling Asia Limited by Chevron Thailand Exploration and Production

Ltd for the provision of its tender assist drilling rig SKD T-18 for offshore development drilling in Thailand. The SKD T-18 contract is for 5 years from June

2014 to May 2019.

iii. Seadrill Jaya Ltd, a company incorporated in Bermuda and wholly-owned by SapuraKencana, has accepted an extension to its contract with BP Trinidad

& Tobago LLC for the provision of offshore drilling rig and services by its tender assist drilling rig SKD Jaya. BP T&T intends to utilise SKD Jaya for its

offshore development drilling campaign in Trinidad & Tobago. The extension of the contract for SKD Jaya is for a period of one year and shall be effective

from August 2014 to July 2015.

5-Dec-14 On 5 December 2014, SAKP announced that two wholly-owned subsidiaries won contracts with a combined value of US$102m (RM350m).

i. SapuraKencana Drilling Holdings Ltd was awarded a contract by Foxtrot International LDC whose main place of business activities is in Abidjan, Ivory

Coast, for the provision of its Semi-Tender Assist Drilling Rig SKD Alliance for a period of approximately 400 days commencing February 2015, with an

option to extend for a further three wells. Foxtrot intends to utilise SKD Alliance for its development drilling campaign offshore Ivory Coast.

ii. Seadrill Esperanza Limited accepted a three month extension to its contract (September 2015 to December 2015) with Hess Equatorial Guinea Inc for

the provision of its Semi-Tender Assist Drilling Rig West Esperanza. Hess Equatorial Guinea will continue to use West Esperanza for its development

drilling campaign offshore Equatorial Guinea.

7-Dec-15 SapuraKencana Drilling Holdings Limited‟s previously announced contract for its Semi-Tender Assist Drilling Rig SKD Alliance for Foxtrot International LDC

in Côte d'Ivoire is now expected to be completed in August 2016, adding an additional five months to the contract. Additionally, Foxtrot still retains the

option to extend the contract by three additional wells, which if exercised, will keep the SKD Alliance on contract until the final quarter of 2016.


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Figure 27: Key events for SapuraKencana Drilling (SKD) - continued


The commercial market for tender drilling rigs

The tender drilling rig market is a relatively small one. As at mid-2016, there were only 12 tender rigs employed in Southeast Asia, the tender rig‟s primary market, in contrast to 18 jack-ups and three semi-subs. There were no tender rigs employed in China, the Indian subcontinent or in the Middle East, where large numbers of jack-ups were employed. Outside of Southeast Asia, there is a small market in West Africa and South America primarily for semi-tenders, according to Riglogix.

Several clients, like Petronas and PTTEP, Chevron and Shell, are comfortable using tender rigs, in our view, and make up the bulk of SKD‟s drilling clients. Chevron is familiar with operating tender rigs in Thailand.

While Southeast Asia is the most popular location to use tender drilling rigs, its use is being expanded to West Africa by clients who are familiar with tender rig operations. At one point in the past, SKD had as many as five tender rigs operating in West Africa (Equatorial Guinea, Congo, Ivory Coast and Angola). SKD even operated the semi-tender SKD Jaya in Trinidad & Tobago under contract with BP from 2011 until August 2016.


14-Jan-16 On 14 January 2016, SAKP announced that SapuraKencana Drilling Tioman Sdn Bhd was awarded a contract from Sarawak Shell Berhad (SSB)/ Sabah

Shell Petroleum Co. Ltd (SSPC) for the provision of its Semi Tender Assist Drilling Rig SKD Esperanza. The contract is for the nominal term of 18 months

with options to extend for up to a further 18 months.

SapuraKencana Drilling Holdings Ltd‟s Tender Assist Drilling Rig SKD T-20 offshore Côte d'Ivoire is now expected to be completed in June 2016, adding to

the original contract term. Additionally, there is the option to extend the contract by 5 additional wells, which if exercised, will keep the SKD T-20 on

contract to the final quarter of 2016.

4-Feb-16 On 4 February 2016, SapuraKencana Drilling Jaya Ltd, a wholly-owned subsidiary, was granted an extension to its contract with BP Trinidad & Tobago LLC.

for the provision of its Semi-submersible Tender Assist Drilling Rig SKD Jaya. BP has extended the use of the SKD Jaya for its development drilling

campaign offshore Trinidad and Tobago for an additional one well and is expected to remain on contract until April 2016.

28-Jun-16 On 28 June 2016, SapuraKencana Drilling Tioman Sdn. Bhd. was awarded a contract by JX Nippon Oil & Gas Exploration (Malaysia) Limited for the

provision of semi-submersible Tender Assist Drilling Rig, SKD Berani. The contract is for JX Nippon‟s development drilling campaign offshore Malaysia

which comprises of three firm wells of approximately total duration of 150 days as minimum; and two option wells if exercised. The contract is expected to

commence by July 2016.

28-Jun-16 On 28 June 2016, SapuraKencana Drilling Jaya Ltd accepted an extension to its contract with BP Trinidad & Tobago LLC for the provision of its Semi-

submersible Tender Assist Drilling Rig, SKD Jaya. BPTT has extended the use of the SKD Jaya for its development drilling campaign offshore Trinidad &

Tobago for an additional one well for approximately 45 days and additional work on an existing well for approximately 60 days.


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Figure 28: Type of rig employed (by region)


2008 2009 2010 2011 2012 2013 2014 2015 Mid-2016

Southeast Asia - employed 59 56 61 73 74 90 80 47 33

- Jack-ups 35 30 34 44 48 60 56 28 18

- Tender drilling rigs 16 15 17 19 17 18 13 13 12

- Semi-submersibles 7 9 6 8 9 10 10 2 3

- Drillships 1 2 4 2 - 2 1 4 -

Southeast Asia - utilisation 74.7% 65.1% 58.7% 63.5% 67.9% 73.8% 65.6% 41.2% 30.3%

- Jack-ups 74.5% 57.7% 61.8% 73.3% 77.4% 87.0% 81.2% 43.1% 29.5%

- Tender drilling rigs 88.9% 83.3% 85.0% 90.5% 77.3% 75.0% 59.1% 56.5% 50.0%

- Semi-submersibles 63.6% 69.2% 30.0% 33.3% 45.0% 43.5% 45.5% 12.5% 18.8%

- Drillships 33.3% 66.7% 44.4% 20.0% 0.0% 33.3% 11.1% 40.0% 0.0%

China - employed 10 10 14 10 8 10 14 13 12

- Jack-ups 6 7 9 7 5 4 8 8 9

- Tender drilling rigs - - - - - - - - -


- Drillships 1 - - - - 1 - - -

China - utilisation 90.9% 83.3% 93.3% 83.3% 72.7% 76.9% 70.0% 59.1% 52.2%

- Jack-ups 85.7% 77.8% 100.0% 100.0% 83.3% 66.7% 72.7% 72.7% 64.3%

- Tender drilling rigs na na na na 0.0% na 0.0% na na


- Drillships 100.0% na na na na 100.0% 0.0% 0.0% 0.0%

Indian Subcontinent - employed 30 32 30 24 30 30 27 22 30

- Jack-ups 24 24 23 19 22 20 20 20 27


- Semi-submersibles 2 2 1 1 4 4 3 - 2

- Drillships 4 6 6 4 4 6 4 2 1

Indian Subcontinent - utilisation 90.9% 94.1% 88.2% 75.0% 90.9% 85.7% 81.8% 59.5% 83.3%

- Jack-ups 92.3% 92.3% 85.2% 70.4% 91.7% 80.0% 76.9% 64.5% 84.4%

- Tender drilling rigs na na na na na na na na na


- Drillships 80.0% 100.0% 100.0% 100.0% 80.0% 100.0% 100.0% 50.0% 50.0%

Middle East - employed 84 74 79 87 94 103 97 94 81

- Jack-ups 81 71 71 80 86 96 94 91 79



- Drillships - - 2 1 1 1 - 1 1

Middle East - utilisation 84.8% 65.5% 66.9% 75.0% 77.7% 76.3% 75.8% 69.1% 57.0%

- Jack-ups 85.3% 66.4% 64.5% 74.8% 76.1% 75.0% 75.8% 69.5% 58.5%

- Tender drilling rigs na na na na na na na na na


- Drillships na na 100.0% 100.0% 100.0% 100.0% 0.0% 50.0% 25.0%


40

Figure 29: Tender drilling rig fleet and utilisation (by region)


2008 2009 2010 2011 2012 2013 2014 2015 Mid-2016 2016F 2017F 2018F

Tender drilling rig fleet size 24 25 27 28 29 33 34 33 30 32 36 38

Southeast Asia 18 18 20 21 22 24 22 23 24

China - - - - 1 - 1 - -

Indian Subcontinent - - - - - - - - -

Middle East - - - - - - - - -

Africa 6 7 7 6 5 7 9 8 4

Europe - - - - - - - - -

North America - - - - - - - - -

South America - - - 1 1 2 2 2 2

Australia - - - - - - - - -

Russian Federation - - - - - - - - -

New Zealand - - - - - - - - -

Tender drilling rig fleet employed 22 19 21 24 22 25 23 19 17 14 9 6

Southeast Asia 16 15 17 19 17 18 13 13 12 12 7 5

China - - - - - - - - - - - -

Indian Subcontinent - - - - - - - - - - - -

Middle East - - - - - - - - - - - -

Africa 6 4 4 4 4 6 8 4 3 1 1 1

Europe - - - - - - - - - - - -

North America - - - - - - - - - - - -

South America - - - 1 1 1 2 2 2 1 1 -

Australia - - - - - - - - - - - -

Russian Federation - - - - - - - - - - - -

New Zealand - - - - - - - - - - - -

Tender drilling rig fleet utilisation 91.7% 76.0% 77.8% 85.7% 75.9% 75.8% 67.6% 57.6% 56.7% 43.8% 25.0% 15.8%

Southeast Asia 88.9% 83.3% 85.0% 90.5% 77.3% 75.0% 59.1% 56.5% 50.0%

China na na na na 0.0% na 0.0% na na

Indian Subcontinent na na na na na na na na na

Middle East na na na na na na na na na

Africa 100.0% 57.1% 57.1% 66.7% 80.0% 85.7% 88.9% 50.0% 75.0%

Europe na na na na na na na na na

North America na na na na na na na na na

South America na na na 100.0% 100.0% 50.0% 100.0% 100.0% 100.0%

Australia na na na na na na na na na

Russian Federation na na na na na na na na na

New Zealand na na na na na na na na na

Forecasts assume no

demolition


41

Figure 30: Tender drilling rigs - Fleet by manager


Number of tender drilling rigs - Total fleet by manager

Rig Manager 2008 2009 2010 2011 2012 2013 2014 2015 Mid-2016 2016F 2017F 2018F

1 Atlantica Tender Drilling Ltd. - - - - - 2 2 3 3 3 3 3

2 Atwood Oceanics 1 1 1 1 1 1 - - - - - -

3 BassDrill Ltd. - - 1 1 1 - - - - - - -

4 Dalian Shipyard - - - - - - - - - - 1 1

5 Energy Drilling Pte Ltd. - - - - - - 2 2 2 2 3 3

6 KCA Deutag 5 5 5 2 2 2 - - - - - -

7 Mermaid Drilling 2 2 1 1 1 1 1 1 1 1 3 3

8 Pentacle - - - - - - - - - - - -

9 Pride International - - - - - - - - - - - -

10 PT Patra 1 1 1 1 1 1 1 1 1 1 1 1

11 PV Drilling - - - 1 1 1 1 1 1 1 1 1

12 Saipem 1 1 1 1 1 1 1 1 1 1 1 1

13 SapuraKencana - - 1 1 1 18 18 16 16 16 16 18

14 Scorpio Drilling International - - - - - - 2 2 2 2 2 2

15 Seadrill Ltd 14 15 16 16 17 3 3 3 3 3 3 3

16 Triumph Drilling - - - 3 3 3 3 3 - 2 2 2

17 Upstream Drilling - - - - - - - - - - - -

Total 24 25 27 28 29 33 34 33 30 32 36 38

Number of tender drilling rigs - Employed fleet by manager


1 Atlantica Tender Drilling Ltd. - - - - - 1 2 1 2 2 2 1

2 Atwood Oceanics 1 1 - - - - - - - - - -

3 BassDrill Ltd. - - 1 1 1 - - - - - - -

4 Dalian Shipyard - - - - - - - - - - - -

5 Energy Drilling Pte Ltd. - - - - - - 1 2 2 2 - -

6 KCA Deutag 4 4 3 1 1 2 - - - - - -

7 Mermaid Drilling 2 1 1 1 - 1 - - - - - -

8 Pentacle - - - - - - - - - - - -

9 Pride International - - - - - - - - - - - -

10 PT Patra - - - - - - - - - - - -

11 PV Drilling - - - 1 1 1 1 1 1 - - -

12 Saipem 1 1 1 1 1 1 1 1 1 - - -

13 SapuraKencana - - 1 1 1 15 14 11 8 8 5 3

14 Scorpio Drilling International - - - - - - - - - - - -

15 Seadrill Ltd 14 12 14 16 16 3 3 3 3 2 2 2

16 Triumph Drilling - - - 2 1 1 1 - - - - -

17 Upstream Drilling - - - - - - - - - - - -

Total 22 19 21 24 22 25 23 19 17 14 9 6

Utilisation of tender drilling rigs


1 Atlantica Tender Drilling Ltd. na na na na na 50.0% 100.0% 33.3% 66.7% 66.7% 66.7% 33.3%

2 Atwood Oceanics 100.0% 100.0% 0.0% 0.0% 0.0% 0.0% na na na na na na

3 BassDrill Ltd. na na 100.0% 100.0% 100.0% na na na na na na na

4 Dalian Shipyard na na na na na na na na na na 0.0% 0.0%

5 Energy Drilling Pte Ltd. na na na na na na 50.0% 100.0% 100.0% 100.0% 0.0% 0.0%

6 KCA Deutag 80.0% 80.0% 60.0% 50.0% 50.0% 100.0% na na na na na na

7 Mermaid Drilling 100.0% 50.0% 100.0% 100.0% 0.0% 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

8 Pentacle na na na na na na na na na na na na

9 Pride International na na na na na na na na na na na na

10 PT Patra 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

11 PV Drilling na na na 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 0.0% 0.0% 0.0%

12 Saipem 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 0.0% 0.0% 0.0%

13 SapuraKencana na na 100.0% 100.0% 100.0% 83.3% 77.8% 68.8% 50.0% 50.0% 31.3% 16.7%

14 Scorpio Drilling International na na na na na na 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

15 Seadrill Ltd 100.0% 80.0% 87.5% 100.0% 94.1% 100.0% 100.0% 100.0% 100.0% 66.7% 66.7% 66.7%

16 Triumph Drilling na na na 66.7% 33.3% 33.3% 33.3% 0.0% na 0.0% 0.0% 0.0%

17 Upstream Drilling na na na na na na na na na na na na

Total 91.7% 76.0% 77.8% 85.7% 75.9% 75.8% 67.6% 57.6% 56.7% 43.8% 25.0% 15.8%

Forecasts assume no

demolition

Forecasts assume no

renewals or extensions


42

Tender drilling rig supply

There is relatively little speculative newbuilding activity in the tender rig marketplace, in contrast to the huge volume of speculative newbuildings in the jack-up rig market.

For instance, at the end of 2014, there were 124 outstanding newbuilding orders for jack-ups with capability to drill in more than 300 feet of water (comprising 55% of the existing fleet), 28 semi-submersible orders (comprising 13% of the existing fleet) and 59 drillship orders (50% of existing fleet) but only eight tender rig orders (comprising 24% of the 34-strong fleet at end-2014).

While the percentage of newbuilding orders is high, the fleet of tender drilling rigs is old and we believe some will likely be scrapped as the probability of future commercial deployment is low. The potential scrapping of five aged tender rigs will mostly offset the potential delivery of eight newbuildings, in our view. Finally, we think some tender drilling rig newbuildings may never be delivered because shipyards may not be able to find alternative buyers.

Tender drilling rig newbuilding orderbook

The outstanding tender drilling rig newbuilding orderbook remains at eight-strong today.

One tender barge named Atlantica Gamma was ordered by Atlantica Tender Drilling Ltd (listed on the Norwegian OTC market) from Dalian Shipyard in August 2012. Construction was supposed to be completed by Dalian Shipyard in 2Q14 but delivery was pushed back several times until Atlantica Tender made the decision sometime in late-2015 or early-2016 to cancel the newbuilding order, alleging yard default. Dalian Shipyard is now holding the asset in its own name but will probably seek a new buye, in our view.

Singapore-based Energy Drilling Pte Ltd ordered EDrill-3 from Cosco Nantong Shipyard in February 2013. Construction was completed in June 2016 but delivery has been delayed until the rig owner/manager succeeds in securing a contract. The rig can be made ready for delivery in 60-90 days.

MTR-3 and MTR-4 were ordered by Mermaid Maritime Plc from China Merchant Heavy Industries in January 2014. The two rigs will be ready for delivery in December 2016 but delivery has been postponed to June 2017. We believe that the two rigs have been put up for sale by MMT given that its existing rig, MTR-2, has been cold stacked.

Upstream Drilling, as rig owner, ordered two rigs from Shanghai Shipyard – the Compact TAD-1 and Compact TAD-2 – in August 2013. Triumph Drilling will be the rig manager for both rigs. The first rig was to be delivered in December 2015 but was delayed to December 2016 and now to March 2017. The second rig was to be delivered in June 2016 but has been deferred to August 2017. We believe delivery may be delayed further given that Upstream Drilling is reportedly in financial trouble.

Finally, SKD has two rigs on order – the SKD Kinabalu and SKD Raiqa – both of which are planned for 2020 delivery.

From the details of each of the newbuildings above, in our view, it appears that all eight may eventually come into the market since all of them have either been completed or are close to completion.


43

Some rigs in the fleet today are very old

We believe there are five tender drilling rigs in the global fleet of 30 units that are potential candidates for scrapping as they are above or close to 30 years old. This includes the SKD Teknik Berkat, which is owned by SKD.

If these five rigs are indeed scrapped, we believe it will largely offset the eight newbuildings in the global orderbook, which we assume will be delivered sometime in the future.

It is also interesting to note from the table below that there is a much greater concentration of cold or ready stacked rigs at the right side of the age distribution curve while there is a greater proportion of younger rigs that remain employed.

SKD‟s rigs span the entire range of ages but the average age is just slightly above 10 years, not too far off from the global average age of 11 years, suggesting that there is plenty of life left for its fleet.

Of SKD‟s 16 rigs, 14 are below 20 years old while two are above. Only one rig is above 30 years old. The potential scrapping of the latter rig will be compensated by two incoming deliveries in 2020 – the SKD Kinabalu and SKD Raiqa.

Figure 31: Global tender rig fleet by age


In conclusion, the tender drilling rig market appears to be headed for modest fleet growth, in our view. We believe the 30-strong global fleet is set to rise to 38 units, assuming all eight newbuildings are delivered, but to only 33 if five aged units are scrapped.

Rig Name Delivery Year Age Current status

1 MTR-2 1981 35 Cold Stacked

2 SKD Teknik Berkat 1982 34 Cold Stacked

3 Glen Affric 1982 34 Cold Stacked

4 Glen Tanar 1982 34 Cold Stacked

5 Baruna I 1989 27 Cold Stacked

6 SKD Pelaut 1994 22 Drilling

7 SKD Menang 1999 17 Cold Stacked

8 SKD Alliance 2001 15 Cold Stacked

9 SKD T-9 2004 12 Drilling

10 SKD Setia 2005 11 Cold Stacked

11 SKD Berani 2006 10 Drilling


13 TAD-1 2008 8 Standby

14 SKD T-11 2008 8 Cold Stacked

15 West Vencedor 2009 7 Ready Stacked

16 Bassdrill Alpha 2010 6 Ready Stacked



19 PV Drilling V 2011 5 Ready Stacked

20 SKD Jaya 2011 5 Cold Stacked

21 T-15 2012 4 Drilling

22 Bassdrill Beta 2013 3 Drilling

23 SKD Esperanza 2013 3 Drilling


25 T-16 2013 3 Drilling

26 EDrill-1 2014 2 Drilling

27 EDrill-2 2014 2 Drilling



30 Atlantica Delta 2015 1 Drilling


44

Tender drilling rig day rates and utilisation levels

The tender drilling rig market is a relatively small one and, hence, with relatively few fixtures. We have set out below a selection of the fixtures for tender barges and semi-tenders since 2005 to give a flavour of how rates have developed over time. Some of the more recent fixtures have been excluded as rate information is not available on Riglogix.

Figure 32: Tender barge contract fixtures and rates

SOURCES: RIGLOGIX

Fixture Date Rig Name Rig Manager Operator Contract start date Contract end date Day Rate

1-Jan-2005 Seahawk Atwood Oceanics Hess Corporation 1-Sep-2009 2-Mar-2010 US$90,000

1-Aug-2005 SKD T-9 Seadrill Ltd ExxonMobil 17-Jan-2006 18-Jan-2009 US$74,000

9-Sep-2005 SKD T-3 Seadrill Ltd PTTEP (NOC) 31-Dec-2007 30-Jun-2008 US$58,000

9-Sep-2005 SKD T-3 Seadrill Ltd PTTEP (NOC) 1-Jul-2008 30-Jun-2012 US$86,500

20-Dec-2005 MTR-1 Mermaid Drilling Hess Corporation 19-Dec-2006 9-Feb-2009 US$70,000

17-Jan-2006 SKD T-10 Seadrill Ltd Carigali-Hess

Operating Co.

1-Sep-2007 15-Sep-2010 US$90,000

17-Jan-2006 SKD Teknik Berkat Seadrill Ltd Carigali-Hess

Operating Co.

1-Aug-2007 27-Apr-2008 US$72,000

24-May-2006 SKD T-6 Seadrill Ltd Carigali-PTT Operating

Co.

1-Jan-2008 30-Nov-2010 US$102,000

12-Jun-2006 T-8 Seadrill Ltd Total 2-May-2007 12-May-2008 US$90,000

16-Jun-2006 SKD T-7 Seadrill Ltd Chevron 1-Nov-2006 1-Nov-2011 US$65,250

13-Sep-2006 SKD T-11 SapuraKencana Chevron 16-May-2008 16-May-2013 US$135,000

13-Sep-2006 SKD T-4 SapuraKencana Chevron 11-Jul-2008 15-Aug-2013 US$104,500

1-Dec-2006 Glen Tanar KCA Deutag Chevron 1-Jan-2008 22-Feb-2009 US$110,000

1-Aug-2007 Glen Affric KCA Deutag Total 28-Apr-2008 1-May-2010 US$105,000

9-Oct-2007 MTR-2 Mermaid Drilling Chevron 22-Apr-2008 30-Jun-2010 US$75,000

16-Nov-2007 T-8 Seadrill Ltd Total 13-May-2008 25-Jun-2009 US$125,000

4-Apr-2008 Glen Tanar KCA Deutag Petronas Carigali

(NOC)

20-Oct-2009 15-Mar-2014 US$129,000

28-Apr-2008 SKD Teknik Berkat Seadrill Ltd Petronas Carigali

(NOC)

28-Apr-2008 31-May-2012 US$133,500

1-Sep-2008 SKD T-9 Seadrill Ltd ExxonMobil 19-Jan-2009 18-Jan-2010 US$139,500

20-Oct-2008 SKD T-19 SapuraKencana Petronas Carigali

(NOC)

10-Sep-2010 9-Nov-2015 US$151,050

20-May-2009 Glen Affric KCA Deutag Total 2-May-2010 30-Jun-2011 US$107,500

25-Feb-2010 SKD T-12 Seadrill Ltd PTTEP (NOC) 1-Apr-2010 30-Apr-2011 US$85,000

3-Jun-2010 MTR-2 Mermaid Drilling Chevron 1-Jul-2010 31-Mar-2011 US$90,740

11-Aug-2010 SKD T-10 Seadrill Ltd Chevron 16-Sep-2010 28-Jan-2013 US$120,000

31-Aug-2010 SKD T-6 SapuraKencana Carigali-PTT Operating

Co.

1-Dec-2010 23-Apr-2013 US$99,000

21-Feb-2011 SKD T-12 SapuraKencana Chevron 1-May-2011 31-Mar-2014 US$120,000

28-Feb-2011 T-15 Seadrill Ltd Chevron 2-Jul-2013 30-Sep-2015 US$127,000

28-Feb-2011 T-16 Seadrill Ltd Chevron 30-Aug-2013 30-Sep-2015 US$127,000

11-Jul-2011 Triumph 101 Triumph Drilling Petronas Carigali

(NOC)

6-Aug-2011 6-Feb-2013 US$115,000

11-Jul-2011 MTR-2 Mermaid Drilling Chevron 20-Jul-2011 14-May-2012 US$98,000

11-Jul-2011 SKD T-7 SapuraKencana Chevron 2-Nov-2011 30-Nov-2013 US$88,000

19-Jan-2012 SKD T-9 SapuraKencana Petronas (NOC) 19-Jan-2012 18-Jun-2013 US$132,000

11-Mar-2012 Triumph 109 Triumph Drilling Petronas (NOC) 28-Mar-2012 30-Sep-2012 US$115,000

16-Mar-2012 Bassdrill Alpha BassDrill Alpha Ltd. Total 2-Oct-2012 1-Dec-2012 US$108,000

4-May-2012 SKD T-18 SapuraKencana Chevron 15-Jun-2014 14-Jun-2019 US$127,000

11-May-2012 MTR-2 Mermaid Drilling Chevron 15-May-2012 15-Nov-2012 US$89,500

14-May-2012 SKD T-10 SapuraKencana Chevron 29-Jan-2013 31-Mar-2014 US$126,000

23-May-2012 SKD Teknik Berkat SapuraKencana Petronas Carigali

(NOC)

1-Jun-2012 31-May-2014 US$133,500

11-Jun-2012 SKD T-3 SapuraKencana PTTEP (NOC) 1-Jul-2012 30-Jun-2013 US$92,000

11-Aug-2012 SKD T-11 SapuraKencana Chevron 17-May-2013 5-May-2016 US$127,500

27-Aug-2012 SKD T-17 SapuraKencana PTTEP (NOC) 5-Jul-2013 4-Jul-2018 US$118,000

8-Oct-2012 SKD T-6 SapuraKencana Carigali-PTT Operating

Co.

24-Apr-2013 1-Aug-2013 US$99,000

19-Nov-2012 Bassdrill Alpha Atlantica Tender

Drilling Ltd.

Total 2-Oct-2013 16-Feb-2015 US$127,771

23-Nov-2012 Glen Affric KCA Deutag PTTEP (NOC) 8-Jan-2013 24-Jul-2014 US$121,350

4-Mar-2013 MTR-2 Mermaid Drilling Chevron 29-May-2013 16-Jun-2014 US$98,000

1-Apr-2014 SKD T-12 SapuraKencana Chevron 1-Apr-2014 31-Mar-2016 US$123,287

16-Jun-2014 SKD T-10 SapuraKencana Petronas Carigali

(NOC)

1-Aug-2014 31-Jul-2017 US$135,000

16-Jun-2014 SKD T-9 SapuraKencana Petronas (NOC) 1-Jul-2014 1-Aug-2019 US$135,000

1-Aug-2014 EDrill-1 Energy Drilling Pte Ltd. PTTEP (NOC) 24-Sep-2017 23-Sep-2018 US$105,000

7-Oct-2015 EDrill-2 Energy Drilling Pte Ltd. PTTEP (NOC) 1-Dec-2015 31-May-2017 US$69,000

8-Dec-2015 T-15 Seadrill Ltd Chevron 1-Oct-2015 1-Jul-2018 US$110,000

8-Dec-2015 T-16 Seadrill Ltd Chevron 1-Oct-2015 30-Aug-2018 US$109,500


45

For tender barges, rates climbed from the US$60k-70k/day level in 2005 to a peak of US$140k-150k/day in 2008 just prior to the Lehman Brothers collapse.

Rates then corrected to the US$90k/day level in mid-2010 before recovering to US$120k/day in 2012.

Rates climbed further to US$130k-140k/day in mid-2014, just prior to the oil price correction.

In late-2015, rates were at the US$110k/day level but, in 2016, tender barge rates most likely corrected to US$70k-90k/day levels, in our estimate.

We believe contracts secured from mid-2016 onwards were most likely at the lower end of the US$70k-90k/day range. We think this was probably the case for the SKD T-12, for which a contract was secured with Chevron to work in Thailand from April 2016 to May 2017.

Figure 33: Semi-tender contract fixtures and rates

SOURCES: RIGLOGIX

The number of fixtures in the semi-tender market is even smaller but rates demonstrated a similar pattern – rising from US$70k-80k/day in 2005 to a peak of more than US$200k/day in 2008. A correction ensued to US$120k/day in 2010, before recovering to about US$190k-200k/day in 2012-14. Rates since corrected to about US$120k-150k/day in 2016, with most fixtures at the lower end of the range.

One feature of the semi-tender market is that charter rates for deployment to West Africa have been materially higher than for deployments in Southeast Asia. The SKD Berani is one case in point. After completing its US$193k/day charter to ConocoPhillips in March 2014 working in Indonesia, it began a new charter to Total to drill in Congo at US$240k/day. In another instance, the SKD Setia was chartered to Cabinda Gulf to work in Angola in mid-2012 at

Fixture Date Rig Name Rig Manager Operator Contract start date Contract end date Day Rate

4-Apr-2003 SKD Pelaut Seadrill Ltd Shell 6-Mar-2005 31-Mar-2009 US$67,000

1-Feb-2005 SKD Setia Seadrill Ltd Murphy Oil 17-Nov-2006 31-Dec-2008 US$86,000

16-May-2005 SKD Alliance Seadrill Ltd Shell 1-Feb-2006 31-Jan-2008 US$76,000

12-Jun-2006 SKD Menang Seadrill Ltd Total 1-Jan-2008 31-May-2009 US$127,000

1-Jul-2006 SKD Alliance Seadrill Ltd Shell 1-Feb-2008 22-Jan-2010 US$99,000

28-Jul-2006 SKD Berani Seadrill Ltd Newfield Exploration 16-Jan-2007 21-Jan-2009 US$126,000

26-Aug-2006 SKD Setia Seadrill Ltd Cabinda Gulf 28-Oct-2009 25-Aug-2012 US$163,000

28-Aug-2008 SKD Setia Seadrill Ltd Murphy Oil 1-Jan-2009 6-May-2009 US$165,000

18-Sep-2008 SKD Alliance SapuraKencana Shell 23-Jan-2010 14-Dec-2014 US$171,000

5-Dec-2008 West Vencedor Seadrill Ltd Chevron 10-Apr-2010 29-Jun-2015 US$212,000

9-Dec-2008 SKD Pelaut Seadrill Ltd Shell 1-Apr-2009 31-Mar-2012 US$138,500

11-Jan-2007 SKD Berani Seadrill Ltd ConocoPhillips 22-Jan-2009 31-Dec-2011 US$164,000

13-Aug-2010 Bassdrill Beta Atlantica Tender

Drilling Ltd.

Petrobras (NOC) 16-Mar-2014 24-Apr-2018 US$203,000

23-Nov-2010 SKD Pelaut SapuraKencana Shell 1-Apr-2012 31-Mar-2015 US$120,000

23-Nov-2010 SKD Pelaut Seadrill Ltd Shell 1-Apr-2012 31-Mar-2015 US$120,000

22-Dec-2010 SKD Jaya SapuraKencana BP 1-Nov-2011 31-Jul-2013 US$165,000

12-Apr-2011 SKD Menang SapuraKencana Murphy Oil 1-Aug-2011 1-Mar-2013 US$160,000

11-Aug-2011 SKD Berani Seadrill Ltd Chevron 15-Mar-2012 30-Jan-2013 US$170,000

27-Dec-2011 SKD Esperanza SapuraKencana Hess Corporation 1-Jan-2015 30-Jun-2015 US$235,000

14-May-2012 SKD Menang SapuraKencana Murphy Oil 2-Mar-2013 28-Jun-2015 US$172,000

11-Aug-2012 SKD Setia SapuraKencana Cabinda Gulf 26-Aug-2012 26-Aug-2014 US$223,000

11-Jan-2013 SKD Berani SapuraKencana ConocoPhillips 31-Jan-2013 31-Mar-2014 US$192,500

22-Mar-2013 Atlantica Delta Atlantica Tender

Drilling Ltd.

Total 30-Jan-2016 5-Oct-2019 US$212,000

1-Apr-2014 SKD Berani SapuraKencana Total 1-Apr-2014 31-Mar-2015 US$295,000

1-Apr-2014 SKD Pelaut SapuraKencana Shell 1-Apr-2015 31-Mar-2017 US$126,000

1-Apr-2014 SKD Setia SapuraKencana Cabinda Gulf 27-Aug-2014 10-Jun-2016 US$224,000

15-Dec-2014 SKD Alliance SapuraKencana Foxtrot 20-Feb-2015 26-Mar-2016 US$180,000

11-Oct-2015 West Vencedor Seadrill Ltd Petronas Carigali

(NOC)

6-Nov-2015 28-May-2016 US$100,000

25-Apr-2016 West Vencedor Seadrill Ltd Petronas Carigali

(NOC)

29-May-2016 21-Aug-2016 US$100,000

22-Nov-2016 West Vencedor Seadrill Ltd ConocoPhillips 15-Mar-2017 15-Jul-2017 US$115,000

14-Jan-2016 SKD Esperanza SapuraKencana Shell 31-Aug-2016 28-Feb-2018 US$105,000


46

US$223k/day but we believe equivalent Southeast Asian rates were probably at the US$170k-180k/day level at that time.

In our view, the significant gap in rates between West Africa and Southeast Asia is mainly because most of the tender rigs are positioned in Southeast Asia and rig owners/managers need to be enticed with higher rates to pull rigs out of Southeast Asia, where demand has traditionally been strong. Also, West African drilling is typically in deepwater, which also attracts a premium relative to shallow water work in Southeast Asia.

Figure 34: Charter contracts for SKD Berani (rates are US$/day)


Prior to the oil price correction, global tender rig utilisation rates generally held up in the mid-70s but, from 2014 onwards, utilisation rates have been declining and are expected to end-2016F at 43.8% only.

Our forecast utilisation rates for 2017F and 2018F shown below assume that all newbuilding orders will be delivered, none of the aged rigs will be scrapped and that there will be no new contract awards. Hence, the utilisation forecasts are absolutely worst-case in nature and are unlikely to be so poor, in our view.

As we had discussed previously, we think scrapping and newbuilding delivery delays are likely. Also, we believe that with higher oil prices engendered by planned OPEC and non-OPEC production cuts from 1 January 2017, production drilling activity will most likely pick up pace in 2017F relative to 2016F.

Figure 35: Global fleet and utilisation of tender drilling rigs


Client Location Start End Days Rate

Newfield Exploration ( 16 Jan 2007 to 21 Jan 2009 ) Malaysia 16-Jan-07 21-Jan-09 737 126,000

ExxonMobil ( 13 Mar 2007 to 23 Aug 2007 ) Malaysia 13-Mar-07 23-Aug-07 164 120,000

Nippon ( 18 Aug 2008 to 21 Jan 2009 ) Malaysia 18-Aug-08 21-Jan-09 157 165,000

ConocoPhillips ( 22 Jan 2009 to 31 Dec 2011 ) Indonesia 22-Jan-09 31-Dec-11 1074 164,000

Chevron ( 15 Mar 2012 to 30 Jan 2013 ) Indonesia 15-Mar-12 30-Jan-13 322 170,000

ConocoPhillips ( 31 Jan 2013 to 31 Mar 2014 ) Indonesia 31-Jan-13 31-Mar-14 425 192,500

Total ( 1 Apr 2014 to 31 Mar 2015 ) Congo 1-Apr-14 31-Mar-15 365 240,000

JX Nippon ( 7 Jul 2016 to 4 Jan 2017 ) Malaysia 7-Jul-16 4-Jan-17 182 120,000

JX Nippon ( 5 Jan 2017 to 15 Apr 2017 ) Malaysia 5-Jan-17 15-Apr-17 101 120,000

Title:

Source:


91.7%

76.0% 77.8%

85.7%

75.9% 75.8%

67.6%

57.6% 56.7%

43.8%

25.0%

15.8%

0

5

10

15

20

25

30

35

40

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009 2010 2011 2012 2013 2014 2015 Mid-2016 2016F 2017F 2018F

Utilisation rate (%) Global tender drilling rig fleet no (assuming no scrapping) Global chartered & working rigs (assuming no new contracts)


47

Assumptions for SKD

We forecast SKD to deliver an average utilisation rate of 58% for its tender rig fleet in FY17F, probably ending 4Q17F at 50% utilisation against 69% utilisation in the 1Q17F.

For the next three years (FY18F-20F), we forecast utilisation rates to stay steady at 55%. The expiry of existing contracts will take the utilisation down to just 15% in FY20F if no new contracts are signed. However, this is probably unrealistic so we have assumed that new contracts will indeed be signed, such as to keep SKD‟s utilisation rates at 55% over this three-year forecast period.

However, we have assumed that average charter contract rates will fall from US$148,729/day in FY16 to a low of US$106,635/day in FY20F.

The decline in weighted average charter rates is mainly due to the expiry of ongoing contracts (which are at higher rates) and assuming that new incoming tender barge contracts are signed at US$75,000/day and at US$130,000/day for new semi-tender contracts. These rates are lower than what SKD is expected to earn in the current financial year FY17F, hence causing the rate dilution.

We have assumed that SKD will cold-stack any of its rigs that are not working and that cash operating costs will decline from US$50,000/day for working tender barges down to just US$1,000/day for cold-stacked tender barges. We have assumed that semi-tenders require US$80,000/day to operate.

As a result of our assumptions, we forecast that SKD‟s EBIT will decline significantly in FY18F yoy and bottom out only in FY20F. We expect rates and utilisation rates to recover gradually in FY21F and beyond.

These forecasts may be conservative if oil prices recover faster than expected, thereby stimulating a faster return to production drilling capex. Hence, there may be upside risks to our present drilling rate and utilisation assumptions.

Figure 36: Key assumptions - Drilling segment


FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY20F FY21F FY22F FY23F FY24F

CY11 CY12 CY13 CY14 CY15 CY16F CY17F CY18F CY19F CY20F CY21F CY22F CY23F

Number of drilling rigs 12 12 14 16 16 16 16 16 16 17 17 17 17

- Tender barges 6 6 7 9 9 9 9 9 9 8 8 8 8

- Semi-tenders 6 6 7 7 7 7 7 7 7 9 9 9 9

TOP DOWN ASSUMPTIONS

Available drilling calendar days 4,345 4,392 4,900 5,583 5,840 5,856 5,840 5,840 5,840 6,071 6,205 6,205 6,205

Charter contract days 3,895 4,348 4,789 5,016 4,605 3,401 3,212 3,212 3,212 3,643 3,723 3,723 4,344

Utilisation rates (%) 90% 99% 98% 90% 79% 58% 55% 55% 55% 60% 60% 60% 70%

Charter contract rates (US$/day) 144,122 147,252 155,405 163,048 154,351 148,729 124,629 118,169 107,232 119,089 121,829 122,601 138,700

- Tender barges 132,190 131,933 130,793 129,152 135,153 123,190 112,612 101,291 84,901 87,028 88,442 90,000 100,000

- Semi-tenders 159,448 162,884 179,822 196,971 185,157 149,631 125,837 126,364 123,688 140,000 140,000 140,000 160,000

Cash operating cost - (US$/day) 60,348 36,487 35,169 35,169 35,169 39,271 39,929 39,929 46,418

- Operating tender barge 65,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000

- Cold-stacked tender barge 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000

- Operating semi-tender 90,000 80,000 80,000 80,000 80,000 80,000 80,000 80,000 80,000

- Cold-stacked semi-tender 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000


48

Figure 37: Key assumptions - Drilling segment (continued)




BASED ON ACTUAL CONTRACTS

Charter contract days 3,895 4,348 4,789 5,016 4,605 3,401 2,368 1,979 859 366 182 0 0

- SKD T-9 (delivered Apr 2004) 365 366 349 365 365 366 365 365 365 366 182

- SKD T-10 (delivered Aug 2007) 365 366 365 243 365 366 365 365 181

- SKD T-11 (delivered Mar 2008) 365 366 365 365 365 95

- SKD T-12 (delivered Feb 2010) 365 366 365 365 365 366 104

- SKD T-17 (delivered Jun 2013) 211 365 365 366 365 154

- SKD T-18 (delivered Mar 2014) 231 365 366 365 365 134

- SKD T-19 (delivered Aug 2010) 365 366 365 365 282

- SKD T-20 (delivered Sep 2014) 90 365 104

- SKD Teknik Berkat (delivered 1990) 365 366 365 120

- SKD Jaya (delivered Mar 2011) 92 366 365 365 365 213

- SKD Alliance (delivered Sep 2001) 365 366 365 317 316 208

- SKD Setia (delivered Aug 2005) 365 366 365 365 365 131

- SKD Pelaut (delivered Mar 1994) 365 366 365 365 365 366 365 365 59

- SKD Berani (delivered Dec 2006) 334 322 365 365 59 209 74

- SKD Menang (delivered Mar 1999) 184 366 365 365 148

- SKD Esperanza (delivered Apr 2013) 214 365 150 245 365 365 120

Charter contract rates (US$/day) 144,122 147,252 155,405 163,048 154,351 133,856 119,901 116,709 96,959 75,000 75,000

- SKD T-9 (delivered Apr 2004) 142,126 132,000 132,000 133,767 135,000 135,000 135,000 135,000 104,918 75,000 75,000

- SKD T-10 (delivered Aug 2007) 120,000 120,049 126,000 132,815 135,000 135,000 104,753 75,000 75,000

- SKD T-11 (delivered Mar 2008) 135,000 135,000 129,658 127,500 127,500 127,500

- SKD T-12 (delivered Feb 2010) 111,466 120,000 120,000 103,358 123,287 87,096 80,000

- SKD T-17 (delivered Jun 2013) 118,000 118,000 118,000 118,000 118,000 118,000

- SKD T-18 (delivered Mar 2014) 127,000 127,000 127,000 127,000 127,000 127,000

- SKD T-19 (delivered Aug 2010) 151,050 151,050 151,050 151,050 151,050

- SKD T-20 (delivered Sep 2014) 168,000 168,000 168,000

- SKD Teknik Berkat (delivered 1990) 133,500 133,500 133,500 133,500

- SKD Jaya (delivered Mar 2011) 165,000 165,000 169,033 175,521 178,000 178,000

- SKD Alliance (delivered Sep 2001) 171,000 171,000 171,000 171,000 180,000 180,000

- SKD Setia (delivered Aug 2005) 163,000 189,066 223,000 223,433 224,000 224,000

- SKD Pelaut (delivered Mar 1994) 138,500 123,033 120,000 120,000 125,030 126,000 126,000 126,000

- SKD Berani (delivered Dec 2006) 164,000 170,070 192,500 278,432 295,000 120,000 120,000

- SKD Menang (delivered Mar 1999) 160,000 160,000 171,047 172,000 172,000

- SKD Esperanza (delivered Apr 2013) 235,000 235,000 235,000 120,000 120,000 120,000 120,000

Theoretical utilisation rates (%) 90% 99% 98% 90% 79% 58% 41% 34% 15% 6% 3% - -

- SKD T-9 (delivered Apr 2004) 100% 100% 96% 100% 100% 100% 100% 100% 100% 100% 50%

- SKD T-10 (delivered Aug 2007) 100% 100% 100% 67% 100% 100% 100% 100% 50%

- SKD T-11 (delivered Mar 2008) 100% 100% 100% 100% 100% 26%

- SKD T-12 (delivered Feb 2010) 100% 100% 100% 100% 100% 100% 28%

- SKD T-17 (delivered Jun 2013) 58% 100% 100% 100% 100% 42%

- SKD T-18 (delivered Mar 2014) 63% 100% 100% 100% 100% 37%

- SKD T-19 (delivered Aug 2010) 100% 100% 100% 100% 77%

- SKD T-20 (delivered Sep 2014) 25% 100% 28%

- SKD Teknik Berkat (delivered 1990) 100% 100% 100% 33%

- SKD Jaya (delivered Mar 2011) 25% 100% 100% 100% 100% 58%

- SKD Alliance (delivered Sep 2001) 100% 100% 100% 87% 87% 57%

- SKD Setia (delivered Aug 2005) 100% 100% 100% 100% 100% 36%

- SKD Pelaut (delivered Mar 1994) 100% 100% 100% 100% 100% 100% 100% 100% 16%

- SKD Berani (delivered Dec 2006) 92% 88% 100% 100% 16% 57% 20%

- SKD Menang (delivered Mar 1999) 50% 100% 100% 100% 41%

- SKD Esperanza (delivered Apr 2013) 59% 100% 41% 67% 100% 100% 33%

Average exchange rate (RM:US$1) 3.063 3.082 3.173 3.296 3.968 4.120 4.300 4.300 4.100 4.100 4.100 4.100 4.100

Period-end exchange rate (RM:US$1) 3.041 3.106 3.343 3.630 4.148 4.400 4.300 4.300 4.100 4.100 4.100 4.100 4.100


49

Figure 38: Contracting status of SapuraKencana Drilling's tender drilling barges

SOURCES: CIMB RESEARCH, RIGLOGIX

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

SKD T-9

(delivered Apr

2004)

SKD T-10

(delivered Aug

2007)

SKD T-11

(delivered Mar

2008)

SKD T-12

(delivered Feb

2010)

SKD T-17

(delivered Jun

2013)

De

liver

edSKD T-18

(delivered Mar

2014)

De

liver

ed

SKD T-19

(delivered Aug

2010)

SKD T-20

(delivered Sep

2014)

De

liver

ed

SKD Teknik

Berkat

(delivered 1990)

20182012 2013 2014 2015 2016 2017

PTTEP (Jul 2013 - Jun 2014)

Sublet to ExxonMobil (Dec 2015 - Jun 2016)

Chevron (Sep 2010 - Jan 2013)

Chevron (May 2008 - May 2013)

Chevron (May 2011 - Mar 2014)

Petronas Carigali (Jan 2012 - Jun 2013) Petronas Carigali (Jul 2014 - Aug 2019)

Petronas Carigali option (Aug 2019 - Aug 2021)

Chevron (Jan 2013 - Mar 2014) Petronas Carigali (Aug 2014 - Jul 2017) Petronas Carigali option (Aug 2017 - Jul 2019)

Chevron (May 2013 - May 2016)

Chevron (Apr 2014 - Mar 2016) Chevron (Apr 2016 - May 2017)

PTTEP (Jul 2013 - Jul 2018)

Chevron (Jun 2014 - Jun 2019)

Petronas Carigali (Sep 2010 - Nov 2015)

Chevron (Nov 2014 - May 2016)

Petronas Carigali(Apr 2008 - May 2012)

Petronas Carigali (Jun 2012 - May 2014)


50

Figure 39: Contracting status of SapuraKencana Drilling's semi-tender drilling rigs

SOURCES: CIMB RESEARCH, RIGLOGIX

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

SKD Jaya

(delivered Mar

2011)

SKD Alliance

(delivered Sep

2001)

SKD Setia

(delivered Aug

2005)

SKD Pelaut

(delivered Mar

1994)

SKD Berani

(delivered Dec

2006)

SKD Menang

(delivered Mar

1999)

SKD Esperanza

(delivered Apr

2013)

De

liver

ed

2012 2013 2014 2015 2016 2017 2018

Hess (Jul 2013 - Dec 2014)

BP (Nov 2011 - Jul 2013) BP (Aug 2013 - Jul 2014) BP (Aug 2014 - Apr 2016) BP(Apr - Jun 2016

BP(Jul -Aug 2016

KPOC (Jul 2013 - May 2014) Foxtrot (Feb 2015 - Mar 2016) Foxtrot (Mar -Aug 2016)

Foxtrotoption not exercised (Aug - Dec 2016)

Cabinda Gulf (Oct 2009 -Aug 2012)c

Cabinda Gulf (Aug 2012 - Aug 2014) Cabinda Gulf (Aug 2014 - Jun 2016)

Shell (Apr 2009 -Mar 2012)

Shell (Apr 2012 - Mar 2015) Shell (Apr 2015 - Mar 2017) Shell option (Apr 2017 - Mar 2019)

Chevron (Mar 2012 - Jan 2013) ConocoPhillips (Jan 2013 - Mar 2014) Total (Apr 2014 - Mar 2015) JX Nippon (Jul 2016 - Jan 2017) JX Nippon option (Jan - Apr 2017)

Murphy Oil (Aug 2011 - Mar 2013) Murphy Oil (Mar 2013 - Jun 2015)

Hess (Jan - Jun 2015) Shell (Aug 2016 - Feb 2018) Shell option (Mar 2018 - Aug 2019)


51

Figure 40: Capacity and utilisation of SKD's tender drilling rigs


Figure 41: Average charter rates and utilisation of SKD's tender drilling rigs


Title:

Source:


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

0%

20%

40%

60%

80%

100%

120%

1QFY13

2Q 3Q 4Q 1QFY14

2Q 3Q 4Q 1QFY15

2Q 3Q 4Q 1QFY16

2Q 3Q 4Q 1QFY17

2Q 3Q 4QF FY15 FY16 FY17FFY18FFY19F

Utilisation rate (%) Available drilling calendar days Chartered & working days

Title:

Source:


0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

0%

20%

40%

60%

80%

100%

120%

1QFY13

2Q 3Q 4Q 1QFY14

2Q 3Q 4Q 1QFY15

2Q 3Q 4Q 1QFY16

2Q 3Q 4Q 1QFY17

2Q 3Q 4QF FY15 FY16 FY17FFY18FFY19F

Utilisation rate (%) Average charter rates (US$/day)


52

P&L forecasts for SKD

We expect SKD to deliver a much smaller core PBT this financial year compared to the previous two years as a result of a decline in utilisation rates and average charter rates. We believe that SKD will deliver a marginal loss in FY18F and for the losses to expand in both FY19F and FY20F. We think SKD‟s performance will start improving from FY21F onwards before achieving profitability in FY24F. As the visibility in the drilling market continues to be poor, this is our best estimate on how SKD‟s tender drilling business will develop over the next few years.

Figure 42: SapuraKencana Drilling P&L (RM m)




Revenue (RM m) 2,739.1 2,955.8 2,084.0 1,807.4 1,713.7 1,482.8 1,867.5 1,952.6 1,965.0 2,593.5

Direct costs -1,373.5 -1,398.6 -880.3 -883.2 -883.2 -842.1 -977.5 -1,015.8 -1,015.8 -1,180.9

Core EBITDA (RM m) 1,365.6 1,557.2 1,203.7 924.2 830.5 640.7 890.0 936.8 949.2 1,412.6



- Depreciation -437.0 -609.4 -615.8 -629.0 -616.5 -595.7 -660.5 -712.9 -712.9 -712.9

- Amortisation -34.3 -31.1 -30.0 -29.7 0.0 0.0 0.0 0.0 0.0 0.0

Core EBIT (RM m) 894.2 916.7 557.9 265.6 214.0 45.0 229.4 223.9 236.3 699.7

Core EBIT margin (%) 32.6% 31.0% 26.8% 14.7% 12.5% 3.0% 12.3% 11.5% 12.0% 27.0%


Associates / JVs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Core PBT (RM m) 635.3 644.2 285.4 -4.7 -60.4 -216.1 -28.9 -32.4 -13.1 491.7

Core PBT margin (%) 23.2% 21.8% 13.7% -0.3% -3.5% -14.6% -1.5% -1.7% -0.7% 19.0%

Exceptionals 63.5 -341.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Reported PBT (RM m) 698.8 302.6 285.4 -4.7 -60.4 -216.1 -28.9 -32.4 -13.1 491.7

Taxation -28.5 0.5 6.0 21.6 2.9 3.2 1.3 -49.2

Effective tax rate (%) -10.0% -10.0% -10.0% -10.0% -10.0% -10.0% -10.0% -10.0%

PAT (RM m) 256.9 -4.3 -54.4 -194.5 -26.0 -29.1 -11.8 442.5


53

ENGINEERING & CONSTRUCTION BUSINESS

EPC + IC = An integrated EPCIC offering

The E&C business is comprised of two separate parts – the „EPC‟ and the „IC‟ parts.

The Engineering, Procurement and Construction (EPC) segment was the legacy of Kencana Petroleum, with its key asset being the Lumut fabrication yard. At the Lumut yard, Kencana Petroleum had fabricated various offshore oil and gas structures like jackets, offshore platforms, skid processing systems, gas processing modules, subsea equipment, and even tender drilling rigs and pipelay barges.

The Installation and Commissioning (IC) segment was the primarily the legacy of SapuraCrest, which had owned derrick lay vessels, diving support vessels, remotely-operated vehicles (ROV), a construction and floatover launch barges, as well as accommodation barges and AHTS that supported offshore hook-up and commissioning (HUC) work.

Hence, the E&C division is now capable of bidding for integrated EPCIC work, HUC work and transportation and installation (T&I) work, with a whole range of assets to offer to oilfield operators and contractors.

It is important to note that SAKP‟s marine vessels are used internally to perform the various offshore jobs that have been secured. The vessels are not chartered out to third party operators; SAKP operates all of its own vessels to fulfill the contractual responsibilities of the various offshore work secured.

Contracting for jobs continues, but at a slower pace

Low oil prices have generally negatively impacted the sanctioning of major projects and the willingness of oil majors to spend on capex. However, the pipeline has not been completely shut off.

We believe SAKP won RM3.8bn in new E&C contracts in the 9M from 1 Feb to 31 Oct 2016, slightly more than the revenue recognised in the period, keeping its E&C orderbook from depleting. This is no small feat, in our view, given the current environment of low pricing and reduced willingness by oil majors to spend. However, we believe that most of the orderbook will be consumed within one year, so SAKP will still need to continue bidding for as much work as possible.

Recent contract wins

Some companies like Oil & Natural Gas Corporation (ONGC) of India have continued to spend, as evidenced by the award in mid-2015 of a turnkey contract to SAKP for the Mumbai High South Redevelopment Phase - III project. The scope of work includes EPCIC of three new wellhead platforms, and the T&I of submarine pipelines and cables. The structures are being built in Lumut, and will then be transported and installed in India. The contract is worth US$273m.

In June 2015, SAKP announced that it had been awarded the contract for the procurement and construction of the central processing platform topsides and jacket for SK310 B15 in June 2016, after a competitive bidding exercise. This project was awarded by Petronas via SKE.

In July 2016, SAKP announced that it had secured the Trans Anatolian Natural Gas Pipeline (TANAP) offshore pipeline installation project from TANAP Doğalgaz İletim AS. This for the EPCI of offshore pipelines and fibre optic cables for TANAP, located offshore Dardanelles Strait in the Sea of Marmara. The project commenced in 3QCY16 and is expected to end in 3QCY18F. The work is being performed by the SapuraKencana 1200 derrick lay vessel. The contract is worth US$126m.


54

Also in July 2016, SAKP told the market that it had secured a contract from Pemex for the procurement and construction of a 36” x 18km Sour Gas Pipeline in Mexico. The scope of work comprises T&I of pipelines, crossings, top side modifications and subsea works, including procurement and project management. The works commenced in July 2016 and is expected to be completed in March 2017. The work is being performed by the SapuraKencana 3500 derrick lay vessel.

The TANAP and Pemex pipelay projects are significant because SAKP is now laying 36” trunk pipes, and is now be qualified to bid for offshore pipelay work for Switzerland-based Nord Stream 2 AG. According to media reports, Nord Stream 2‟s twin pipeline will help to meet Europe‟s gas import needs, with capacity to transport 55bn cubic metres of gas per year. The Nord Stream 2 pipeline involves two parallel 48” lines, for roughly 1,200km, each starting from south-west of St Petersburg (a Russian port city on the Baltic Sea coast) and ending at German coast, Greifswald.

These overseas contract wins suggest that SAKP is globally competitive, and that it has been able to diversify its E&C customer base geographically, from Malaysia, to India, Middle East and Latin America, where capex spending is still robust. This is necessary because material Malaysian jobs have been difficult to come by since 2015.


55

Figure 43: Sample of ongoing and recently completed jobs at SAKP's Engineering and Construction business


Engineering, Procurement & Construction

Client / Location Work Scope Duration

Petronas (via SapuraKencana

Energy Sarawak)

SK310 B15, Sarawak

Hess Exploration & Production

Malaysia B.V.

North Malay Basin

Offshore Construction & Installation


ONGC

Mumbai High fields, India

ExxonMobil Exploration and

Production Malaysia Inc

F12 field, offshore Sarawak

Petronas Carigali Sdn Bhd

F12 field, offshore Sarawak

TANAP Doğalgaz İletim A.S.

Offshore Dardanelles Strait in

the Sea of Marmara, Turkey

Pemex Exploración y

Producción

Mexico

6

Integrated Transportation and

Installation of Offshore

Facilities (PAN Malaysia),

Offshore Terengganu, Sabah

and Sarawak Malaysia

Transport & installation of platforms & pipelines Jan 2014 - Dec 2016

PTSC Offshore Services Joint

Stock Company

Su Tu Trang field, Vietnam

7Offshore installation of LQ jacket, piles and appurtenances (base scope) and module 1

(optional scope).

Approximately three months

during 3QCY16

5

Procurement and construction of a 36” X 18 KM Sour Gas Pipeline (KMZ – 76) from

Platform E – KU – A2 to Platform CA – AJ – 1(J4) in Ciudad del Carmen, Campeche,

Mexico. T&I of pipelines, crossings, top side modifications and subsea works, including

procurement and project management. Contract is worth US$113m.

Jul 2016 - Mar 2017

3Transport & installation of pipeline, substructure and topside for F12 Gas Development

Project.

Approximately eight months

from Sep 2016

4

EPCI of offshore pipelines and fibre optic cables offshore Dardanelles Strait in the Sea of

Marmara. TANAP is a strategic natural gas pipeline project linking Europe and Asia,

supplying natural gas from the Southern Gas Corridor project in Azerbaijan through Georgia

and Turkey and onwards to Europe. TANAP is 58% owned by the State Oil Company of

Azerbaijan Republic (SOCAR), 30% owned by the state-owned Turkish BOTAS Petroleum

Pipeline Corporation (BOTAS) and 12% owned by British Petroleum Plc (BP). Contract is

worth US$125.9m.

The project is scheduled to

commence in 3Q16 and end in

3Q18.

1EPCIC of 11 pipeline systems and associated topside modifications in B127 and

surrounding Mumbai High fields located off the west coast of India.20 months from 4QCY16

2Transport and installation of offshore facilities for Guntong Pipelay Project, consisting of

one new pipeline from Tapis Q to Guntong C. Two months (Mar - May 2017)

1Procurement and construction for the topside package and jacket package for SK310 B15

development.

Approximately 14 months and

is expected to be completed

by 2QCY17

2

Provision of EPC of the Subsea Isolation Valve (SSIV) Systems, Subsea Umbilical and

Flying Lead, Hydraulic Power Unit (HPU), Topside Umbilical Termination Unit (TUTU),

Umbilical Termination Assembly (UTA) and the supporting details.

Approximately 18 months,

completed around 1QCY17


56

Figure 44: Sample of ongoing or recently-completed jobs at SAKP's Engineering and Construction business - continued


Prospects

SAKP continues to actively bid for EPCIC work in India from ONGC, as well as in Mexico and the Middle East. However, SAKP may have to sacrifice some of its margins, due to strong global competition, in our view. Therefore, we believe SAKP needs to reduce costs to remain profitable, by reducing overheads and improving efficiency in execution.

Additionally, SAKP is also bidding for inspection, repair and maintenance (IRM) work and well-intervention jobs, as IRM spending is necessary and is still continuing globally.

T&I work globally continues to see deferrals, although the Indian bidding scene remains active. However, according to Upstream, over the next two years in 2017F-2018F, Malaysia might see some T&I of offshore facilities and pipelines, including for the SK310 B15 gas field development by SKE, where pipelines need to be laid to transport the B15 gas to the B11 export line. Another pipeline installation job may be for the E6 oilfield development, where, according to Claksons, the gas will be sent to the production hub at E11 via E8, and crude will be piped to D35.

Pan Malaysia contracts can also be another source of work, where the standard practice is to give priority to Malaysian-owned vessels. Pan Malaysia contracts are umbrella contracts that are administered by Petronas; they consolidate all of the Malaysian PSC contractors‟ requirements for offshore services, and award call-out contracts that can last 2-4 years each time. While there is no guarantee on utilisation, since these are a call-out contracts, there is a minimum level of utilisation embedded in the contracts.

SAKP has a long history of winning Pan Malaysia jobs. In 2009, SapuraCrest won three packages out of four with respect to a 3+1+1 year Pan Malaysia contracts that took effect from January 2010 and was later extended for one year in 2013.

In late-2013, SAKP announced that it had won T&I and HUC work in the 3+1 year Pan Malaysia contracts which commenced from January 2014.

Hook Up & Commissioning Greenfield


MISC Offshore Floating

Terminals (L) Limited

Abu field, PM318 block,

Peninsular Malaysia

BASF Petronas Chemicals

Sdn Bhd

Hibiscus

Selex ES Malaysia Sdn Bhd

West Coast of Sabah

Woodside Energy Julimar Pty

Ltd

Balnaves field, Australia

Brownfield Rejuvenation


1 Shell AustraliaIntegrated service solution for Light Well Intervention services utilising SapuraKencana‟s

Light Well Intervention System and vessel.Five years from Jun 2016

3

Front End Engineering Design (FEED) & Engineering, Procurement, Construction,

Installation and Commissioning (EPCIC) of the Radio Shortwave Support System Project

for Petronas Offshore Facilities off the West Coast of Sabah.

Approximately 19 months

from Jun 2016.

4Project management, engineering and offshore execution for the removal of certain subsea

infrastructure associated with the Balnaves field.

Approximately six months

from Jun 2016

1 Demobilisation of FSO AbuFive months during 3Q-

4QCY16

2

Procurement, fabrication, construction, installation and pre-commissioning work for the

Infrastructure and Utility Upgrading Projects. Three packages; boiler, condensate polishing

unit and used fire-fighting water system, complete with common facilities.

Approximately nine months

from Jun 2016.


57

Upstream reported in July 2016 that SAKP will likely bid for the new 2+1+1 year Pan Malaysia contracts that will take effect in 2017. SAKP should stand a good chance, in our view, since Petronas‟s policy has been to give priority to Malaysian-owned vessels.

Key E&C assets

Fabrication yard

SAKP has three fabrication yards – the wholly-owned flagship Lumut Fabrication Yard and Teluk Kalong Fabrication Yard, and the 50% owned Labuan Shipyard.

Interestingly, the Labuan Shipyard is accounted for as an associate under the Energy division, and is not parked under the E&C division. The Labuan Shipyard is not operated by SAKP, but by its partner (UMNO-linked Realmind) which owns the remaining 50% stake.

SAKP‟s fabrication yard competes with MMHE and TH Heavy Engineering. Neither competitor has been as successful as SAKP in renewing their depleting orderbooks, due in part to execution issues.

According to SAKP, the fabrication yard in Lumut was more than 50% utilised at the start of 2016, but is likely to end the year at about 40% utilisation rate. A 75% utilisation rate is usually considered ideal by SAKP. The Teluk Kalong yard is very busy and used primarily to serve ExxonMobil‟s HUC requirements under the Pan Malaysia contract.

In FY15, when oil prices were still high, fabrication work was still plentiful. In FY16, SAKP continued to benefit from the contracts secured in FY15. But in FY17F, the outstanding orderbook declined.

Figure 45: Fabrication yards


Derrick lay vessels (pipelay vessels)

SAKP currently has six derrick lay vessels, which are used to lay underwater rigid steel pipes offshore. These pipes link oilfields to other oilfields, to offshore processing facilities, and then finally to onshore terminals for further processing and export.

SAKP also has a JV with Seadrill to own and operate six Pipe Lay Support Vessels (PLSV) in Brazil (more on this in the next section). These PLSVs lay flexible offshore pipes, which look like yellow, rubber hoses, in ultra-deepwater locations. By contrast, SAKP‟s six derrick lay vessels lay rigid steel pipes using an S-lay system.

Pipelaying jobs were a core part of SapuraCrest‟s profits, and typically accounted for about one-third of the company‟s pretax profits in the years prior to the merger. As the only company in Malaysia which owned and operated derrick lay vessels, SapuraCrest naturally received first right of refusal on any pipelaying jobs within Malaysian waters. In the early years when SapuraCrest‟s

Yard location Acreage Features

1 Lumut Fabrication Yard 273 Easy access to Indian Ocean & South China Sea.

Equipped with fully integrated computerized yard management

system and data tracking tools.

2 Labuan Shipyard 88 Support HUC operations in East Malaysia.

SAKP's HUC operations in the East of Malaysia are supported by its

Labuan yard.

3 Teluk Kalong Fabrication Yard 20 In the East Coast of Peninsular Malaysia.

Operating as full-fledged fabrication, logistics support and supply base.


58

fleet of owned derrick lay vessels was small, it also regularly chartered pipelay barges from third-party owners in order to fulfill its contracts and jobs.

SAKP‟s oldest derrick lay vessel is the SapuraKencana 900, which was built in 1982 and upgraded in 2009. It is 100% owned by SAKP, but only has a lift capacity of 900 tonnes. According to Clarksons, there is a glut in the marketplace currently for vessels of this lift capacity.

The Sapura 3000 was built in 2008 and has a lift capacity of 3,000 tonnes. It is owned by SapuraAcergy Sdn Bhd, a 50:50 JV with Norway‟s Acergy SA. The vessel originally belonged to SapuraCrest which had partnered Norway‟s Stolt Offshore SA, which changed its name to Acergy SA in 2006 after the exit of its founder and major shareholder Stolt Nielsen. In 2011, Acergy SA merged with Subsea 7 Inc. to form Subsea 7 SA.

Subsequent to the delivery of the Sapura 3000, SapuraCrest entered into minority partnerships with two Indian companies to co-own additional derrick lay vessels.

From these partnerships, the LTS 3000 was delivered to a JV that is 40% owned by SAKP and 60% owned by India‟s Larsen & Toubro. The vessel was delivered in 2010.

Also in 2010, SAKP accepted delivery of the SapuraKencana 2000, which was originally named the Quippo Prakash, in a 26:74 JV with India‟s AP Prakash Shipping Company. SAKP later purchased its partner‟s stake in the vessel in 2012 at a cost of US$22.5m. Like the LTS 3000, the SapuraKencana 2000 is a shallow-water pipelay barge.

The partnerships with the Indians were meant to help SapuraCrest redeploy the vessels outside of Malaysia during Malaysia‟s monsoon season, i.e. to use them in India, so that utilisation rates can be kept high.

In September 2011, SapuraCrest signed two shipbuilding contracts of about US$110-120m each for two derrick lay vessels to be built at Cosco Nantong. Both these wholly-owned vessels were delivered in 2014, and were named the SapuraKencana 3500 and SapuraKencana 1200.

The SapuraKencana 1200 and SapuraKencana 3500 are currently being used to lay pipes for the TANAP project and the sour gas pipeline in Mexico, respectively.

For the >1,200 tonne derrick lay and offshore construction vessel category, we understand from SAKP that there are only 20-25 vessels globally, and SAKP has four vessels in this category (2 x 2,000 tonne, 1 x 3,000 tonne, and 1 x 3,500 tonne vessels), giving it fairly material market share in this specialised business.

Although most of SAKP‟s derrick lay vessels are working, they may not be working for all of the days of the year, as it is difficult to secure back-to-back contracts.


59

Figure 46: Derrick lay vessels


Survey vessels

SAKP has four survey vessels that are primarily used to survey the seabed prior to pipe installation work. Of the four ships, three are very old. SapuraKencana Wira is the newest addition to the fleet, aged 6 years.

Figure 47: Survey vessels


Vessel of name Year built Gross

tonnage

Flag LOA

(m)

Breadth

(m)

Draught

(m)

No of accom

berth cabins

Lift

capacity

(tonnes)

Pipelaying capability Shipyard

1 SapuraKencana 900 a 1982 (2009

upgrade, 2013

accom

increase)

11,916 Malaysia 129.14 31.93 5.35 292 900 Lay up to 42" diameter

pipeline at water depth up

to 400m

Kambara

Marine, Japan

2 Sapura 3000 b 2008 Malaysia 151.2 37.8 6.5 330 3,000 Pipe size 6" to 60"

diameter, S-lay system,

with DP2 capability

Sembcorp

Tanjung

3 SapuraKencana 2000 c 2010 Malaysia 120 40.1 6 300 2,000 Pipe size 6" to 60"

diameter

Shanghai

Zhenhua

4 LTS 3000 d 2010 30,628 India 160.7 37.8 6.5 289 2,722 Pipe size 6" to 60"

diameter

ASL

(Singapore)

5 SapuraKencana 3500 e 2014 40,845 Panama 156.5 44.8 7.4 300 3,500 Pipe size 6" to 60"

diameter at water depth

up to 2,000m, with DP3

capability

Cosco

Nantong

6 SapuraKencana 1200 e 2014 32,504 Panama 153.6 35 6.5 300 1,200 Pipe size 6" to 60"

diameter at water depth

up to 2,000m, with DP3

capability

Cosco

Nantong

Notes

a

b

c

d

e SapuraKencana 3500 and SapuraKencana 1200 are owned by SapuraKencana TL Offshore Sdn Bhd (100% subsidiary).

Technical characteristics

SapuraKencana 900 is owned by SapuraKencana 900 Pte Ltd (100% subsidiary).

Sapura 3000 is owned by SapuraAcergy Sdn Bhd, 50:50 JV with Norway's Acergy.

SapuraKencana 2000 was originally a 26:74 JV with India's AP Prakash Shipping Company; SAKP purchased its partner's

stake for US$22.5m in 2012.

LTS 3000 is owned by L&T Sapura Shipping Pvt Ltd, a 40:60 JV with India‟s Larsen & Toubro.

Vessel of name Year

built

Refitted Gross

tonnage

Type of survey

vessel

LOA

(m)

Breadth

(m)

Draught

(m)

Deck

area (m2)

1 SapuraKencana Samudra 1975 1989 1061 Geotechnical 58.95 12.6 4.1 270

2 SapuraKencana Wira 2010 - 1988 Geotechnical 61.2 16.0 5.1 360

3 Teknik Perdana 1974 2000 2270 Geophysical 86.95 13.4 - -

4 Teknik Putra 1980 1995 1009 Geophysical 59.65 11.0 3.7 -


Notes

Drilling, hydraulic push sampling,

downhole, CPT, wireline hydraulic

packer, engineering for foundation

design and offshore laboratory testing

Capable of drilling and sampling up to

1,500m combine water depth and

drilling

Built to perform full ocean depth

geophysical and general survey

operations

Typically deployed onto pipeline and

cable route surveys contracts


60

Subsea construction and floatover launch barge

SAKP has one of each type of vessel, which are used for the launching of jackets, installation and floatover of topsides, and transportation of heavy cargoes.

In December 2011, SapuraCrest completed the acquisition of Clough Limited‟s marine construction business for A$127m. Clough has expertise in the installation of Subsea, Umbilicals, Risers and Flowlines (SURF), which are primarily employed for deepwater oil and gas production.

Figure 48: Subsea construction vessel


Figure 49: Floatover Launch Barge


DP2 diving and ROV support vessels

In 2011, Kencana Petroleum purchased 100% stake in Allied Marine & Equipment Sdn Bhd, which was then a Petronas-licenced provider of offshore diving and underwater-related services for 1) the inspection, repair and maintenance (IRM) of structures, pipelines and risers, and 2) the construction of underwater oil and gas facilities. The AME acquisition came with three vessels – the Allied Centurion, the Allied Conquest and the Allied Achiever.

SAKP has 42 units of ROVs which are owned by Australia-based Total Marine Technology Pty Ltd (TMT), a 94% subsidiary of SAKP that was acquired by SapuraCrest in 2005.

The diving and ROV support vessels, and the ROV units, are very suitable for IRM work. Oil companies are still focused on IRM activities such as decommissioning, light well intervention, and pipeline repair and maintenance work.

Figure 50: DP2 diving and ROV support vessels



tonnage

Flag LOA

(m)

Breadth

(m)

Draught

(m)

No of accom

berth cabins

Deck area

(m2)

Shipyard

1 SapuraKencana Constructor 2008 6,200 Panama 117.35 22 7.15 120 1,120 Kleven Verft, Norway

Notes

a

b


The SapuraKencana Constructor is a 117m subsea support vessel equipped with a saturation dive system including Self Propelled Hyperbaric Lifeboat (SPHL), 2 x

remotely operated vehicles (ROVs), a helideck, moon pool and accommodation for 120 personnel.

The vessel is 100% owned by SapuraKencana Constructor Pte Ltd, via 100% owned SapuraKencana Australia Pty Ltd.


tonnage

Flag LOA

(m)

Breadth

(m)

Draught

(m)

Max Jacket

Launch Weight

(tonnes)

Max Deck

Transportation

Weight (tonnes)

1 SapuraKencana FLB-1 2014 17,569 Malaysia 160 45.94 6.5 16,000 14,500


Owned by SapuraKencana Allied Marine Sdn Bhd (100% subsidiary)

Vessel of name Year

built

Gross

tonnage

Flag LOA

(m)

Breadth

(m)

Draught

(m)

No of accom

berth cabins

Deck area

(m2)

Shipyard

1 SapuraKencana Achiever 2001 1,383 Malaysia 60.0 13.3 4.1 60 350 Astilleros Balenciaga S.A Zumaia, Spain

2 SapuraKencana Conquest 2006 2,739 Malaysia 76.2 15.1 5.0 75 560 Western Shiprepair, Klaipeda, Lithuania

3 Allied Jane 2010 3,389 Malaysia 78.0 20.0 6.5 120 700 Guangzhou Hangtong Shipbuilding

4 Sarku Clementine 1997 3,637 Malaysia 75.0 18.3 5.0 64 632 President Marine, Singapore



61

Offshore support vessels (OSV)

SAKP owns a fleet of four AHTS and five accommodation barges. These vessels are used primarily for HUC jobs,

Figure 51: Offshore Support Vessels (OSV)


Anchor Handling Tug Supply (AHTS)

Vessel of name Year built Gross tonnage Flag LOA

(m)

Breadth

(m)

Draught

(m)

BHP Deck area

(m2)

1 Teknik Beta 1999 443 Malaysia 37.0 10.8 4.0 4,000 150

2 Teknik Alpha 1998 443 Malaysia 37.0 10.8 4.0 4,000 150

3 MV Gemia 2009 2143 Malaysia 65.5 16.0 5.8 8,076 435

4 KPV Kapas 2009 1704 Malaysia 60.0 16.0 5.1 5,221 390

Accommodation boats and barges

Vessel of name Year built Gross tonnage Flag LOA

(m)

Breadth

(m)

Draught

(m)

No of accom

berth cabins

Deck area

(m2)

1 Sarku Santubong 1979 2,999 Malaysia 75.1 17.3 5.0 123 511

2 Sarku 2000 1991 6,914 Malaysia 91.5 30.5 4.7 270 1,115

3 Sarku 300 2008 10,197 Malaysia 111.6 31.7 4.5 300 1,926

4 KPV Redang 2011 3,719 Malaysia 75.0 20.0 5.2 200 520

5 SapuraKencana Aman 2016 5,174 Malaysia 82.0 22.0




62

Figure 52: Key events for SapuraKencana Petroleum Berhad (SAKP) - Engineering & Construction



22-May-12 On 22 May 2012, SAKP announced that SC Projects Pty Ltd, a wholly owned subsidiary incorporated in Australia, had on 26 April 2012 received the award

from Origin Energy Resources Ltd (Origin) for the Origin Otway Phase 3 Development. The Origin Otway Phase 3 Development will be developed and

operated by Origin together with its joint venture partners Toyota Tsusho (Australasia) Pty Ltd and Benaris International Pty Ltd.

SC Projects Pty Ltd‟s scope of work will involve project management, installation engineering, procurement, fabrication, installation and pre-commissioning

works associated to the development of the Geographe discovery, located approximately 55 km offshore Port Campbell, Victoria, Australia. SapuraClough will

utilise the vessel Normand Clough as the main installation vessel to carry out the work. The value of the Award is approximately A$51m for a contract period of

14 months.

24-May-12 On 24 May 2012, SAKP announced that TLO, a wholly owned subsidiary, had on 21 May 2012 received confirmation from Petronas on the exercise of its option

to extend the Pan Malaysia contract for one year (2013) effective from the expiry of the current contract primary term. The value of the expected scope of

Works for year 2013 is approximately RM1.3bn. The original contract was awarded to SapuraCrest Petroleum for the integrated transportation and installation of

offshore facilities for years 2010 to 2012 (announced 24 December 2009).

13-Jul-12 On 13 July 2012, SAKP announced that it planned to acquire the remaining 74% of Quippo Prakash Pte Ltd (QP) that it did not own, for cash consideration of

US$22.5m. QP owned the QP 2000 derrick lay barge (2,000 mt lifting capacity) which was built in 2009. On 1 August 2008, SAKP took a 26% stake in QP to

jointly participate in the construction and financing of QP2000, with 74% owned by its Indian partner. The acquisition was completed on 28 August 2012.

26-Jul-12 On 26 July 2012, SAKP announced that its wholly-owned subsidiary, Kencana HL Sdn. Bhd. has received Notices of Award both dated 2 July 2012 from

Murphy Sarawak Oil Co., Ltd. for the provision of Engineering, Procurement, Construction and Commissioning (EPCC) of Patricia Satellite-A Platform (PT-SA)

and Serendah Accommodation-A Platform (SN-AA) topsides facilities for the SK309/311 Serendah, Patricia & South Acis (SPSA) Development Projects

which is part of Murphy Sarawak‟s SK309/SK311 oil and gas field development located offshore Bintulu, Sarawak. The total value of both contracts are

estimated between RM250m and RM300m. The contracts are expected to be completed and delivered to Murphy Sarawak in 1H13.

2-Aug-12 On 2 August 2012, SAKP announced that a wholly-owned subsidiary company in Australia had, on 30 July 2012, been awarded a contract by PTTEP

Australasia (Ashmore Cartier) Pty Ltd for the provision of the vessel “Normand Clough” to support the hook-up and commissioning activities of the Montara

Development Project. The Montara field is located approximately 700km west of Darwin in the Timor Sea, off the coast of Northern Australia. The value of the

contract amount with options exercised is approximately A$14.8m (~RM50m). The total duration of the Contract is approximately three months, commencing

early October 2012 following the Normand Clough campaign in Sakhalin.

9-Aug-12 On 9 August 2012, SAKP announced that Kencana HL Sdn Bhd has received a letter of award from Kebabangan Petroleum Operating Company Sdn Bhd

(KPOC) for the provision of hook-up and commissioning services for Kebabangan Northern Hub Development Project. The total value of the contract is

approximately RM106m. The work for the contract is expected to commence in mid-2012 and is expected to be completed by mid-2014.

10-Sep-12 On 10 September 2012, SapuraAcergy Sdn Bhd has been awarded a contract for the charter of a vessel, Sapura 3000 to Construcciones Maritimas

Mexicanas S.A. de C.V. to undertake heavy lifts in the Gulf of Mexico region. SASB is a joint-venture company equally owned by SapuraKencana and Subsea

7 S.A. The charter commenced on 18 August 2012 for a duration of 125 days and is valued at approximately US$45m.

21-Sep-12 On 21 September 2012, wholly-owned Sarku Engineering Services Sdn Bhd has commenced Arbitration Proceedings by filing a Statement of Claim against

ONGC in relation to disputes pursuant to the contract for a sum of INR1,063.8m and USD123.8m (including interest, costs, losses and damages). This relates

to an award from ONGC to Sarku Engineering of a contract for the revamping of 26 well platform project dated 30 December 2005 (announced 3 January 2006).

25-Sep-12 TL Offshore Sdn Bhd has entered into a contract for the Manora Field Development, Thailand with Pearl Oil (Amata) Limited, a Mubadala Petroleum affiliate.

TLO's portion of the contract is worth US$25m. Pearl Oil (Amata) Limited is the operator of the Manora oil field in the G1/48 concession with partners Tap

Energy (Thailand) and Northern Gulf Petroleum. The contract comprises of procurement of equipment and bulk materials, fabrication, transportation, installation

and hook-up of a Wellhead Processing Platform and two 2km pipelines in the Manora oil field, which lies in 44m of water approximately 80km from the

coast of Thailand. Works for this Contract will be carried out in consortium with Clough (Thailand) Co. Ltd. (CTL), a subsidiary of Clough Limited, where CTL will

undertake the procurement and fabrication and TLO will undertake the transportation and installation. Works for this contract is scheduled to commence in

September 2012 and completed in early 2014.

1-Nov-12 On 1 November 2012, Kencana HL Sdn Bhd received a letter of award from HESS Exploration and Production Malaysia B.V. for the provision of Engineering,

Procurement, Construction and Commissioning of Kamelia-A Wellhead Platform for Early Production System of the Integrated Gas Development Project (North

Malay Basin Field). The Award comprises the provision of EPCC of a WHP for Kamelia Field, which is part of the North Malay Basin, an area located

approximately 300km offshore Peninsular Malaysia. The work is expected to be completed by 1Q13. The award is valued at approximately RM135.8m.

1-Nov-12 On 1 November 2012, wholly-owned subsidiary company, Allied Marine & Equipment Sdn Bhd, has received a letter of award from Petronas Carigali Sdn Bhd

for the Provision of Underwater Services. The value of the award is approximately RM700m which comprises provision of underwater services, including

inspection, repair and maintenance services utilising specialised vessels, equipment and personnel covering Petronas Carigali offshore oil and gas fields in

Malaysia. The duration of the award is 3½ years which will be effective from October 2012 until April 2016, with the option to extend for one additional year.

10-May-13 On 10 May 2013, TL GeoSciences Sdn Bhd has been awarded by Petronas Carigali with a contract for the provision of marine geohazards investigation

services. The value of the contract is approximately RM60m which comprises of provision of marine geohazards investigation services covering Petronas

Carigali's offshore oil and gas fields in Peninsular Malaysia. The duration of the contract is for three years effective from 12 April 2013 until 11 April 2016, with

the option to extend for an additional one year period until 11 April 2017.

27-May-13 On 27 May 2013, SAKP announced that wholly-owned Kencana HL Sdn Bhd accepted a letter of award on 16th May 2013 from ExxonMobil Exploration and

Production Malaysia Inc. for the provision of hook up and commissioning and topside major maintenance service for a primary term of five years with an

option to extend for a further one year period. The contract includes the supply of manpower and equipment, material purchased and provision of marine spread.

The total value of the contract is based on unit rates for the services provided estimated to be between RM300m and RM500m over the contract period.

4-Jun-13 On 4 June 2013, wholly-owned TL Offshore Sdn Bhd was awarded with a contract for the provision of Installation Services for Offshore Facilities for Diamond

Development Project, Blocks 01 & 02, with PTSC Offshore Services Joint Stock Company. The contract comprises of installation services for platform and

pipeline in the Diamond field, located 18 km North of Ruby field and 155km East of Vung Tau. TLO‟s scope of work is valued at approximately US$35m.

9-Jul-13 On 9 July 2013, wholly-owned Kencana HL Sdn Bhd received a letter of award from Trans Thai-Malaysia (Malaysia) Sdn Bhd (TTM) for the provision of

engineering, procurement, construction, installation and commissioning (EPCIC) of JDA Gas Balancing Evacuation (EVA) Project for TTM. The contract is

valued at approximately US$180.65m. The contract is for a period of three years and work is expected to commence in 2Q13 and expected to be completed by

1Q16.

25-Oct-13 Wholly-owned subsidiary Allied Marine & Equipment Sdn Bhd (AME) has been awarded a contract for the provision of Subsea Inspection Services for Carigali

Hess' Facilities, with Carigali Hess Operating Company Sdn Bhd. The contract comprises of subsea services which includes inspection of Carigali Hess

jackets, pipelines and floating storage and offloading vessel (FSO). AME will also provide diving equipment, remotely operated vehicle (ROV), support vessel,

personnel and inspecting/recording equipment as well as tools and spares required to perform the services and other work. The contract is valued at

approximately RM62m over a four year period on call out basis.


63

Figure 53: Key events for SapuraKencana Petroleum Berhad (SAKP) - Engineering & Construction (continued)



16-Dec-13 Wholly-owned TL Offshore Sdn Bhd (TLO) has been awarded contracts for Packages C & D by eleven PETRONAS‟ Production Sharing Contractors for the

provision of works and services for the integrated Pan Malaysia transportation and installation of offshore oil and gas facilities for a duration of three years

from 2014 to 2016 with optional extension of one year. TLO has received the official letters of award in relation to the contracts from all of the PSCs. The

contracts would require the provision and performance of various transportation and installations services for offshore oil and gas structures which includes

topside, jackets and risers as well as laying of subsea pipelines and its associated works. The scope of works and project schedule shall be specified and

determined on a yearly basis. The contracts value will depend on the actual work orders issued by the PSCs during the contracts period. Commencement of

Works is expected to be in March 2014 around various offshore locations in Malaysian waters.

7-Mar-14 On 7 March 2014, SAKP took delivery of the SapuraKencana 1200, a derrick lay vessel, from Cosco Nantong.

16-May-14 In Russia, TL Offshore Sdn Bhd (TLO), a wholly-owned subsidiary of the Group's Offshore Construction and Subsea Services Division, won a charter contract

with Heerema Marine Contractors Nederland SE (HMC) for the provision of a command installation vessel “SK1200” for the Arkutun-Dagi Project in Sakhalin.

HMC was awarded a contract by Exxon Neftegas Ltd (Exxon) for the transportation and installation of the Arkutun-Dagi topsides. HMC in turn awarded TLO

with transportation of Exxon‟s Temporary Living Quarters under the Charter. The Charter will be for a firm period of 55 days and the Charterer has an option of 15

daily extensions.

16-May-14 TLO also won a subcontract in India for the provision of transportation and installation works in connection with the British Gas Exploration & Production India

Limited Mukta B Platform and Pipeline Project by Larsen & Toubro Ltd (L&T). This was awarded through L&T Sapura Offshore Private Limited, an Indian

joint venture company between L&T and Nautical Power Pte Ltd, a wholly-owned subsidiary of SapuraKencana. The LTS Subcontract comprises the provision of

transportation and installation of jacket, topside and pipelines, including tie-ins, transportation and installation engineering, procurement and provision of riser

clamps for risers at existing platforms, pre-commissioning and project management.

16-May-14 SapuraAcergy Sdn Bhd, a joint venture company equally owned by SapuraKencana and Subsea 7 S.A., has been awarded a 20-month contract for the

provision of subsea services for Brunei's Maharaja Lela South Project by TOTAL E&P Borneo B.V. The MLS contract comprises Engineering, Procurement,

Supply, Construction, Pre-Commissioning, Transportation and Installation related to offshore platform and pipeline works together with associated assistance to

start-up.

16-May-14 In Malaysia, JX Nippon Oil & Gas Exploration (Malaysia) Limited has awarded Kencana HL Sdn Bhd, a wholly-owned subsidiary of the Group's Fabrication,

Hook-up and Commissioning division with a contract for the provision of detailed engineering, procurement, construction, and commissioning for the Layang

Development (Facilities) Project. The Layang Project is for a period of two years and is expected to be completed by 2Q16.

18-May-14 On 18 May 2014, SAKP took delivery of the SapuraKencana 3500, a derrick lay vessel, from Cosco Nantong.

19-Jun-14 On 19 June 2014, SAKP was awarded two new Engineering, Procurement, Construction, Installation and Commissioning (EPCIC) contracts totalling

approximately US$415m (RM1.3bn) in areas offshore Malaysia and Thailand by Carigali-PTTEPI Operating Company Sdn Bhd (CPOC) and Hess Exploration

and Production Malaysia B.V.

The EPCIC contract award from CPOC is for four wellhead platforms and associated subsea pipelines for Block N-17 and B-17-01 Field Phase 3

Development Project in the Thailand-Malaysia Joint Development Area (JDA). The contract period for this work is for approximately 39 months, with work

commencing in June 2014 and expected to be completed in September 2017.

The contract award from Hess Exploration is for an EPCIC for three wellhead platforms in the North Malay Basin. This contract will run for approximately 25

months with work starting in the second quarter of 2014 and expected to be completed by 3Q16.

2-Jul-14 TL Geohydrographics Pte Ltd, a wholly-owned subsidiary of SAKP, has been awarded a contract for the charter of Teknik Perdana, a survey vessel and the

provision of MBES survey work in the Republic of Colombia for the Anadarko Colombia Company project. The contract is for a period of approximately 50 days

and the works are expected to be completed on or about early August, 2014. The contract value is approximately US$1.7m.

29-Aug-14 On 29 August 2014, wholly-owned TL Offshore Sdn Bhd (TLO) was awarded:

(a) A project for the provision of offshore pipeline construction for Nam Con Son 2 Gas Pipeline Project – Phase 1, valued at approximately US$89m. The

project comprises transportation and installation of 151 km offshore pipeline in Nam Con Son field and 19 km in Dai Hung field located at southwest of Nam Con

Son Basin, Vietnam, 260km from Vung Tau. Work will be performed over two campaigns in 3Q14 and 2Q15.

(b) A subcontract from PTSC Offshore Services Joint Stock Company for installation of the Te Giac Trang Field H5 Wellhead Platform Jacket and Drilling

Wellbay Module I at Block 16-1, offshore Vietnam, valued at approximately US$7.3m.

29-Aug-14 On 29 August 2014, SAKP disclosed that SapuraAcergy (Australia) Pty Ltd, a wholly owned entity of SapuraAcergy Sdn Bhd, a 50:50 JV between SAKP and

Subsea7 S.A had, on 19 August 2014, entered into a contract for the transportation and installation of a compressor module and a condensate pump module

onto the 'Yolla A' platform, which is located in Yolla Field, Bass Strait, Australia with Origin Energy Resources Limited.The engineering activities for the

works have commenced and the offshore installation campaign is scheduled to commence in 4Q14 for an estimated duration of eight days.The contract is

valued at approximately US$28m.

5-Dec-14 On 5 December 2014, SAKP announced three Fabrication, Hook-up and Commissioning contracts with a combined value of approximately US$206m

(RM710m).

i. Wholly-owned Kencana HL Sdn Bhd (KHL) secured an EPCC contract awarded by Petronas Carigali for BNJT-K (Baronia) and TTJT-A (Tukau) Wellhead 5-Dec-14 On 5 December 2014, SAKP announced three offshore construction and subsea services contracts with a combined value of US$151m (RM520m)

i. Wholly-owned TL Offshore Sdn Bhd was awarded a contract by Vestigo Petroleum Sdn Bhd for the provision of transportation and installation of the Central

Processing Platform for the Tembikai (OIL) Development. The Tembikai Oil Project comprises transportation and installation of the CPP “Tembikai Oil” for

the development of Tembikai Marginal field located approximately 150km east of Terengganu, offshore Peninsular Malaysia. The contract is expected to be

completed around March 2015. The scope of work is valued at approximately US$12.9m.

ii. SapuraAcergy (Australia) Pty Ltd, a wholly owned entity of SapuraAcergy Sdn. Bhd., a 50:50 JV owned by SapuraKencana and Subsea 7 S.A. had entered

into a sub-contract with Heerema Marine Contractors Australia Pty Ltd for the provision of buoyancy tanks removal and disposal for the Chevron Wheatstone

project which is located in Wheatstone field, Western Australia. The sub-contract is valued at approximately US$18m.

iii. SapuraAcergy Sdn Bhd, a 50:50 owned by SapuraKencana and Subsea 7 S.A. was awarded with a contract from Total E&P Myanmar for the Engineering,

Procurement, Construction and Installation of the Wellhead Platform 4 and Lower Compression Platform, Pipelines and Cable. Contract works at the Yadana

Field, offshore Myanmar, are expected to be completed by 4Q16. The contract is valued between US$120m and US$130m.


64




11-May-15 On 11 May 2015, SAKP announced that its wholly-owned subsidiary companies within the Engineering and Construction – International Division were awarded

contracts with a combined value of up to US$269m (RM969m) in the following countries:

i. SapuraKencana Mexicana S.A.P.I. de C.V. has been awarded with the installation of structures and superstructures of fixed marine platforms, pipelaying and

lifting of major power generation equipment, utilising the DP3 heavy-lift and pipelay vessel SapuraKencana 3500, in the Marine Regions, Bay of Campeche,

Gulf of Mexico by Pemex Exploración y Producción. This award marks the initiation of SapuraKencana‟s local operations in Mexico. The value of the award is

between US$41.2m and US$98.1m.

ii. SapuraKencana TL Offshore Sdn Bhd (SKTLO) in consortium with PT Encona Inti Industri of Indonesia, has been awarded with the contract for the work of

Offshore and Onshore Pipeline Installation In Respect of the Construction of Kalija 1 Natural Gas Transmission Pipeline of Kepodang – Tambak Lorok

Segment by PT PGAS Solution. The award comprises scope of work for the transportation and installation of 14” x 200km of gas pipeline from Kepodang field

offshore to Onshore Receiving Facility. The work will be performed in the Muriah PSC, Central Java, Indonesia. The total value of the award to the consortium is

a lump sum fee of US$97.5m.

11-May-15 iii. SKTLO has been awarded a contract for the provision of services for the Installation of Nearshore and Offshore Pipeline for Thai Binh - Ham Rong Gas

Distribution & Gathering System Project, Phase 1 located in Block 102-106, Offshore Thai Binh Province, North of Vietnam by PTSC Offshore Services Joint

Stock Company.

iv. SKTLO has been awarded a contract for the provision of services for the Installation of the H5-WHP Topside and Pipelines for Te Giac Trang Field

Development Project located in Block 16-1, offshore Vietnam S.R. by PTSC Offshore Services Joint Stock Company.

v. SKTLO has been awarded a contract for the provision of services for the installation of Offshore Facilities for Thai Binh Development Project Blocks 102

& 106, Offshore Vietnam by PTSC Offshore Services Joint Stock Company.

vi. SKTLO has been awarded a contract for the provision of transport and installation services for the PB Gas Lift Riser Replacement project at Panna Offshore

Field, located approximately 95 kilometres offshore north-west of Mumbai, India by BG Exploration and Production India Limited.

The total value of the awards in Vietnam and India is US$73.5m.

13-Jul-15 On 13 July 2015, SAKP announced that its wholly-owned subsidiary company, Kencana HL Sdn Bhd (currently known as SapuraKencana HL Sdn Bhd), was

awarded with a lump sum contract by ONGC for the Mumbai High South Redevelopment Phase - III project on a turnkey basis. The scope of work includes

but not limited to surveys, design, engineering, procurement, fabrication, transport and installation, hook-up, and commissioning of three new Well Head

platforms, around 116 km of submarine pipelines, around 7.5 km of submarine cable, modification works on existing platforms including clamp-on works on two

platforms, subsea repair works on three jackets and D1C pile remedial works. The contract value is approximately US$273m including taxes and duties, and

excluding the service tax in India. The overall project completion is scheduled on 30 April 2017.

3-Aug-15 On 3 August 2015, wholly-owned subsidiary SapuraKencana Brunei entered into a shareholders agreement with Euthalia (and RSK Petroleum Sdn Bhd). The

purpose of the 70:30 JV is to identify potential business opportunities, investments, joint ventures, business combinations or other transactions in Brunei with

respect to works and services in all four categories listed in Directive 2 Local Business Development Framework for the oil and gas industry issued by the

Ministry of Energy, Prime Minister‟s office dated 1 February 2012.

7-Dec-15 On 7 December 2015, SAKP announced two contract wins with a value of approximately US$52m (CIMB estimate).

i. SapuraKencana HL Sdn Bhd was awarded a contract for the Provision of EPCC for SIPROD on D35DP-B Project by Roc Oil (Sarawak) Sdn Bhd. The works

involve the preparation of SIPROD package on D35DP-B platform for a drilling campaign and subsequent well tie-in activities. The contract is for a period of

approximately four months and works are expected to commence in 4Q15 with expected completion by 1Q16.

ii. SapuraKencana TL Offshore Sdn Bhd (SKTLO) was awarded a subcontract from main contractor, L&T Hydrocarbon Engineering Limited (LTHE), for the

additional development of the Vasai East Project in India . SKTLO‟s scope of work under the subcontract is for the installation of structures and pipelines and

other subsea work at Vasai East which is located in the Arabian Sea approximately 78km offshore Mumbai. The works is expected to be completed in March

2016.

14-Jan-16 On 14 January 2016, SAKP announced that various wholly-owned subsidiaries were awarded contracts and extensions with a combined value of approximately

US$28m to US$30m (CIMB estimate, up to RM129m).

i. SapuraKencana HL Sdn. Bhd. has been awarded a contract for the Provision of Hook-Up & Commissioning works for KNPG-B Phase II, Kinabalu Non

Associated Gas (NAG) Development Project by THHE Fabricators Sdn. Bhd. This involves the provision of supervision, manpower, equipment and marine

spread to carry out the hook up and commissioning of a Compression System module and High Pressure High Temperature (HPHT) facilities on the KNPG-B

Central Processing Platform. The contract is for a period of approximately eight months and works are expected to commence in 1Q16.

ii. SapuraKencana Technology Sdn. Bhd. has been awarded a contract by Hess Exploration & Production Malaysia B.V. for the provision of Engineering,

Procurement and Construction of the Subsea Isolation Valve (SSIV) Systems at Block PM302, North Malay Basin. The scope of work under the contract

includes the complete responsibility for carrying out and completing the work for SSIV Skids, Subsea Umbilical and Flying Lead, Hydraulic Power Unit (HPU),

Topside Umbilical Termination Unit (TUTU), Umbilical Termination Assembly (UTA) and the supporting details. The contract is for a period of approximately 18

months. It has commenced and is expected to complete around 1Q17.

4-Feb-16 On 4 February 2016, SAKP announced that SapuraKencana GE Oil & Gas Services Sdn Bhd, a joint venture between SapuraKencana Services Sdn Bhd and

GE Power Systems (Malaysia Sdn Bhd), was awarded contracts with a combined value of approximately US$366m (CIMB estimate, RM1,517m).

i. An 10-year award by Murphy Sarawak Oil Company Ltd for comprehensive maintenance of GE-supplied gas turbines and centrifugal compressors for a

period of approximately 10 years.

ii. An 10+5 year award by Petronas Floating LNG1 (L) Ltd (PFLNG) for comprehensive maintenance of GE-supplied aeroderivative gas turbines, centrifugal

compressors and electric generators and electric motors.

24-Mar-16 On 24 March 2016, SapuraKencana GE Oil & Gas Services Sdn Bhd (SKGE) was awarded a Long Term Service Agreement by Petronas Floating LNG1 (L)

Ltd. (PFLNG) to provide maintenance services for PETRONAS‟ two forthcoming floating LNG vessels. Under the agreement, SKGE will provide PETRONAS with

complete maintenance services for their fleet of twelve gas turbines as well as their fleet of GE compressors, generators and electric motors to be installed on

their floating LNG vessels. These maintenance activities will be fully executed by the joint venture‟s growing pool of local qualified field service engineers and

diagnostic experts.

The first of the two vessels, PFLNG SATU will be deployed on the Kanowit field offshore Sarawak. It will add approximately 1.2mtpa of LNG production to

Malaysia‟s LNG exports and is another step in increasing the country‟s presence in global markets.


65




28-Jun-16 On 28 June 2016, SAKP announced that it had secured the following contracts with a combined value of approximately US$95m (CIMB estimate, RM390m):

(1) SapuraKencana HL Sdn. Bhd. (SKHL) has been awarded a contract by BASF Petronas Chemicals Sdn. Bhd. for the procurement, fabrication,

construction, installation and pre-commissioning work for the Infrastructure and Utility Upgrading Projects. The works involve the provision of supervision,

manpower, equipment and materials to carry out the construction, installation and pre-commissioning of three packages; boiler, condensate polishing unit and

used fire-fighting water system, complete with common facilities. The contract is for a period of approximately nine months.

(2) SKHL has been awarded a contract by Selex ES Malaysia Sdn. Bhd. for the provision of Front End Engineering Design (FEED) & Engineering,

Procurement, Construction, Installation and Commissioning (EPCIC) of the Radio Shortwave Support System Project for Petronas Offshore Facilities off the

West Coast of Sabah. The contract is for a period of approximately 19 months.

(3) SKHL has been awarded a contract by SapuraKencana Energy Sarawak Inc. for the provision of procurement and construction for the topside package

and jacket package for SK310 B15 development. The contract is for a period of approximately 14 months and is expected to be completed by 2Q17.

(4) SapuraKencana Australia Pty. Ltd. (SKA) has completed a light well intervention project for Woodside Petroleum Limited. SKA provided an integrated

services solution for the project. The work was performed using the SapuraKencana‟s assets, including the “SID” Light Well Intervention system and vessel,

SapuraKencana Constructor.

(5) SKA has been awarded a contract by Woodside Energy Julimar Pty. Ltd. for phases of the Balnaves Decommissioning project for the Balnaves field

which is located offshore North-West Australia. This work includes the project management, engineering and offshore execution for the removal of certain

subsea infrastructure associated with the Balnaves field. The contract is for a duration of approximately six months.

(6) SKA has been awarded a light well intervention contract on call-off basis by Shell Australia. SKA is supplying an integrated service solution for Light Well

Intervention services utilising SapuraKencana‟s Light Well Intervention System and vessel. The contract is for a duration for five years.

25-Jul-16 SAKP's wholly-owned subsidiary company, SapuraKencana Mexicana S.A.P.I. de C.V., has been awarded a contract with a value of approximately US$113m.

The contract is for the Procurement and Construction of a 36” X 18 KM Sour Gas Pipeline (KMZ – 76) from Platform E – KU – A2 to Platform CA – AJ – 1(J4)

in Ciudad del Carmen, Campeche, Mexico by Pemex Exploración y Producción. The scope of work comprises transportation and installation of pipelines,

crossings, top side modifications and subsea works, including procurement and project management. Works in relation to the contract are scheduled to

commence in July 2016 until March 2017.

28-Jul-16 SAKP's wholly-owned subsidiary company, SapuraKencana TL Offshore Sdn. Bhd. secured a US$125.9m (RM510m) contract for the Trans Anatolian Natural

Gas Pipeline (TANAP) from TANAP Doğalgaz İletim A.S.

This for the Engineering, Procurement, Construction and Installation (EPCI) of offshore pipelines and fibre optic cables for TANAP, located offshore Dardanelles

Strait in the Sea of Marmara. The project is scheduled to commence in 3Q16 and end in 3Q18.

TANAP is a strategic natural gas pipeline project that links the two continents of Europe and Asia, supplying natural gas from the Southern Gas Corridor project

in Azerbaijan through Georgia and Turkey and onwards to Europe. TANAP is 58% owned by the State Oil Company of Azerbaijan Republic (SOCAR), 30%

owned by the state-owned Turkish BOTAS Petroleum Pipeline Corporation (BOTAS) and 12% owned by British Petroleum Plc (BP).

To date, SapuraKencana has successfully secured a total of RM3.1bn of new contract wins in the current financial year.

1-Sep-16 On 1 September 2016, SAKP's wholly-owned subsidiary, SapuraKencana TL Offshore Sdn Bhd (SKTLO) was awarded five new contracts by clients with a

combined value of approximately US$65.3m (RM264m). Details of the contract awards are listed below:

(1) SKTLO has been awarded a contract by Repsol Oil and Gas Malaysia Limited (formerly known as Talisman Malaysia Limited) for the transportation and

installation of offshore facilities for Year 2014-2016 – BOC-BOD Pipeline Replacement Tie-In Project. The scope of work consists of subsea tie-in of spools

to be executed at Bunga Orkid Development located at Northern field of PM3 Commercial Arrangement Area, North-East of Peninsular Malaysia, bordering

Vietnam and Thailand. The Repsol Contract is for a period of approximately 1 month.

(2) SKTLO has been awarded a contract by MISC Offshore Floating Terminals (L) Limited for the provision for demobilisation of Floating Storage and

Offloading (FSO) ABU Project. The scope of work consists of a base scope for demobilisation and offloading of an FSO which is located approximately

320km offshore of Kertih, Terengganu, Malaysia in the ABU cluster field at Block PM-318 and optional scope for the towing of the FSO and installation of FSO

temporary mooring arrangement at the lay-up area. The MISC Contract is for a period of approximately 5 months.

(3) SKTLO has been awarded a contract by PTSC Offshore Services Joint Stock Company for the offshore installation of LQ jacket, piles and appurtenances

(base scope) and module 1 (optional scope). The work location is at Su Tu Trang Field within the Vietnamese water. The PTSC Contract is for a period of

approximately 3 months.

(4) SKTLO has been awarded a contract by Petronas Carigali Sdn. Bhd. for the provision of transportation and installation of pipeline, substructure and topside

for F12 Gas Development Project. The work will be executed approximately 180km offshore of North West of Bintulu, Sarawak, Malaysia. The Petronas

Carigali Contract is for a period of approximately 8 months.

(5) SKTLO has been awarded a contract by ExxonMobil Exploration and Production Malaysia Inc. for the provision of transportation and installation of offshore

facilities for Guntong Pipelay Project. The scope of work consists of transportation and installation of one new pipeline from Tapis Q to Guntong C. This

contract will commence after the seasonal monsoon from around March 2017 and is expected to end in May 2017.

30-Sep-16 On 30 September 2016, SAKP announced that it has been awarded new contracts by clients with a combined value of approximately US$123m (CIMB

estimate, RM509m).

(1) A consortium of SapuraKencana TL Offshore Sdn. Bhd. and SapuraKencana HL Sdn. Bhd. has been awarded a contract by ONGC in relation to the B127

Cluster Pipeline RTR Project. The scope of work consists of engineering, procurement, construction, installation and commissioning of 11 pipeline systems

and associated topside modifications in B127 and surrounding Mumbai High fields located off the west coast of India. The contract is for a period of 20 months.

(2) SapuraKencana Subsea Services Sdn. Bhd. has been awarded a project by Petronas Carigali for the provision of underwater maintenance services for

Sepat MOPU. The scope of work consists of inspection, maintenance, repairs, drilling support and other work for PCSB‟s underwater facilities to be executed

in the water shore and offshore Peninsular Malaysia at 0-2000 meters water depth, with diver intervention at 0-300 meters water range at the Sepat MOPU

Field. The contract is for a period of approximately 2 months.


66

Assumptions for E&C division

We estimate that SAKP has already secured some RM2bn worth of E&C contracts that may be recognised in FY18F, and we have assumed a further RM2bn in revenue that can be recognised from new contracts that have yet to be secured. We believe SAKP won RM3.8bn in new E&C contracts in the 9M from 1 Feb to 31 Oct 2016, so we do not think our assumptions look unrealistic, especially if oil prices recover.

Figure 56: Key assumptions - E&C segment (FYE Jan)


P&L forecasts for the E&C division

SAKP‟s E&C division reached the zenith of the earnings in FY15 and FY16, when it delivered core PBT of about RM1bn p.a. In the three years prior to that, i.e. in FY12-FY14, core PBT averaged RM700m p.a. We view the period between FY12 and FY16 as the five golden years for the E&C division. In contrast, between FY08 and FY11, E&C delivered just over RM100m core PBT p.a.

The golden years were the direct result of heightened Petronas capex spending under the-then Petronas president and CEO, Tan Sri Shamsul Azhar Abbas, and the highly-profitable US$100/bbl oil price environment which persisted for four years between 2011 and 2014. At that time, Petronas announced a five-year capex programme of RM300bn over 2012-2016 (an average of RM60bn p.a.), and Petronas Carigali and other PSC contractors in Malaysia did not hold back capex spending in an effort to reverse Malaysia‟s production decline and boost its stagnant reserves.

These boom times are unlikely to return anytime soon, in our view, and we are forecasting core PBT levels for the next five years at about half, or slightly more than half, of the peak earnings last seen in FY15 and FY16.



Existing orderbook (RM m) 4,648 2,017 325 0 0 0 0 0

- Recognised during 9MFY17 3,388

- To be recognised during 4QFY17F 1,260

- To be recognised during FY18F 2,017

- To be recognised during FY19F 325

Assumed new order wins (RM m) 2,000 4,000 4,000 4,000 4,500 5,000 5,000

Expected total E&C revenue (RM m) 4,648 4,017 4,325 4,000 4,000 4,500 5,000 5,000


67

Figure 57: Engineering & Construction P&L (FYE Jan) (RM m)




Revenue (RM m) 5,221.0 5,646.1 4,647.5 4,017.5 4,325.0 4,000.0 4,000.0 4,500.0 5,000.0 5,000.0

- Fabrication, Hook-up & Commissioning 2,117.4 2,801.2

- Offshore Construction & Subsea Svs 3,103.6 2,844.9

Direct costs -4,055.1 -4,235.0 -3,834.2 -3,294.3 -3,546.5 -3,280.0 -3,280.0 -3,690.0 -4,100.0 -4,100.0

Core EBITDA (RM m) 1,165.9 1,411.1 813.3 723.1 778.5 720.0 720.0 810.0 900.0 900.0



- Depreciation -260.5 -292.3 -230.4 -237.0 -238.7 -245.6 -257.1 -266.9 -266.9 -266.8

- Amortisation -5.0 -2.5 -2.5 -2.5 0.0 0.0 0.0 0.0 0.0 0.0

Core EBIT (RM m) 900.5 1,116.3 580.4 483.7 539.8 474.4 462.9 543.1 633.1 633.2

- Fabrication, Hook-up & Commissioning 293.1

- Offshore Construction & Subsea Svs 607.4

Core EBIT margin (%) 17.2% 19.8% 12.5% 12.0% 12.5% 11.9% 11.6% 12.1% 12.7% 12.7%


Associates / JVs 148.1 143.3 213.9 232.4 259.8 218.9 218.2 246.3 258.7 250.9

- SapuraAcergy (Sapura 3000) - 50% 36.0 3.5 5.0 10.0 20.0 25.0 25.0 30.0 30.0

- Seabras Sapura - 50% 60.0 170.4 207.4 229.8 178.9 173.2 201.3 208.7 200.9

- L&T (owner of LTS 3000) - 40%, SK GE

Oil & Gas Services - 51%, and Others 47.3 40.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0

Core PBT (RM m) 924.3 1,087.4 622.1 545.3 626.1 528.3 518.0 627.5 734.3 752.7

- Fabrication, Hook-up & Commissioning 629.5

- Offshore Construction & Subsea Svs 294.8

Core PBT margin (%) 14.9% 16.7% 8.8% 7.8% 8.5% 7.7% 7.5% 8.5% 9.5% 10.0%

Exceptionals 0.0 -231.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Reported PBT (RM m) 924.3 856.4 622.1 545.3 626.1 528.3 518.0 627.5 734.3 752.7

Taxation -122.5 -75.1 -87.9 -74.3 -71.9 -91.5 -114.1 -120.4

Effective tax rate (%) -30.0% -24.0% -24.0% -24.0% -24.0% -24.0% -24.0% -24.0%

PAT (RM m) 499.7 470.2 538.2 454.1 446.0 536.0 620.1 632.3


68

PLSV BUSINESS

Exposure to Brazilian pre-salt developments

SAKP currently owns and operates six Pipe Lay Support Vessels (PLSV) in a 50:50 JV with Seadrill Limited. The JV is parked under Seabras Sapura Participações SA, which wholly owns Sapura Navegação Marítima SA (SNM). Both companies are incorporated in Brazil. For the purposes of this report, we shall refer to SNM as the entity owning and operating the PLSV business in Brazil.

These six PLSVs are on long-term time charter to Petrobras, where they lay flexible pipes in Brazilian pre-salt, ultra-deepwater offshore oil developments. The vessels are responsible for interconnecting oil wells to manifolds and FPSOs. Each vessel also has two Remotely Operated Vehicles (ROV), which are responsible for underwater maneuvering operations.

The six PLSVs carry the following names: Diamante, Topazio, Onix, Jade, Esmeralda and Rubi.

The pipelay business was a long-time SapuraCrest business as it had owned and operated derrick lay vessels (synonymous with the term „pipelay barges‟) since it took delivery of the Sapura 3000 in February 2008. When Petrobras opened the tender for PLSVs in Brazil, SapuraCrest was an enthusiastic bidder, as it wanted to diversify its operations out of the Southeast Asian and Indian regions.

The first contract

In November 2011, SNM won the bid to build, charter and operate three PLSVs for a firm period of five years (with option for a further five years), i.e. 5+5 year contracts. The contract was awarded by Petrobras, and is worth US$1.4bn for the firm period only. The three vessels that are under this contract are the Sapura Diamante, Sapura Topazio, and Sapura Esmeralda.

On 1 March 2012, IHC Offshore & Marine, part of IHC Merwede, and SapuraCrest signed two contracts for the design, engineering and construction of two new 550 tonne pipelaying vessels (Sapura Diamante and Sapura Topazio). A third contract was signed with OSX Construção Naval SA Brazil for the design and engineering of a 300 tonne pipelaying vessel (Sapura Esmeralda), as well as a large equipment package supplied by IHC Engineering Business, among others. The orders have a total value of €450m (or US$594m at an exchange rate of US$1.32:€1).

IHC Merwede will build the two identical 550 tonne pipelaying vessels at the Krimpen aan den IJssel yard in Holland. OSX will construct the 300 tonne pipelaying vessel in Brazil to meet local content requirements.

We estimate that Sapura Diamante and Sapura Topazio had a newbuilding price of US$220.4m each, but the Sapura Esmeralda may cost a higher US$263m, based on our guesstimates using IHC Merwede disclosures.

All three ships will install flexible pipelines in Brazilian waters, pursuant to Petrobras‟ contracts for the charter and operation of pipelaying support vessels, which were awarded to SapuraCrest.

The second contract

In June 2013, SNM won an 8+8 year contract from Petrobras for another three vessels, i.e. Sapura Onix, Sapura Jade, and Sapura Rubi. The contract is worth US$2.7bn for the firm period.

On 9 August 2013, IHC Merwede's Offshore division successfully secured orders worth over €1bn (US$1,334m at an exchange rate of US$1.3342:€1) for the design, engineering and construction of a total of six pipelaying vessels.


69

The agreements for these six ships have been signed with Subsea 7 and Seabras Sapura; the latter being the 50:50 JV between SAKP and Seadrill.

From the above disclosure, we estimate that all three vessels cost about US$222.1m each to build.

Commercial terms

The contract start and end dates are set out in the table below. For the 5+5 year contracts, the disclosed contract value of US$1.4bn for the firm period implies a time charter rate of US$255,707/day.

Meanwhile, for the 8+8 year contracts, the disclosed contract value of US$2.7bn for the firm period implies a time charter rate of US$308,218/day.

The above time charter rates imply full technical utilisation; if technical utilisation falls below 100%, the actual earned time charter rates could be lower.

The time charter rate which SNM secured for the second contract was higher than the first contract, despite the technical similarity of five out of the six PLSVs. We believe this was most likely because SNM raised its bid price for the second round of contracts, to be more in line with what its competitors were bidding.

The bareboat portion of the time charter rate is typically denominated in US$, while the operating cost portion is denominated in Brazilian real to reflect the currency in which the crew, supplies, maintenance, etc. are paid. The operating cost portion is subject to cost escalation in the Brazilian Consumer Price Index.

Since the start of commercial deployment, each of the six vessels have enjoyed high technical utilisation rates of 97-98% or higher. This performance may be better than its competitors. Keeping to high utilisation rates is important so as to maximise revenues and avoid penalties for poor performance.

From April 2016 onwards, SNM discounted rates on the three 8+8 year contract vessels – Sapura Onix, Sapura Jade and Sapura Rubi – by 3% until end-CY2017F. The discount was offered as a way to assist Petrobras in its effort to save on capex. We do not expect SNM to offer further discounts to Petrobras, nor for Petrobras to ask for more discounts.

Petrobras is billed on a monthly basis for the charter hire. Since the start of the charters, the charter hire has been paid within 30 days of billing. Earlier this year, we believe investors were fearful that SNM‟s contracts with Petrobras may be cancelled or the pricing renegotiated lower. With the exception of the small 3% discount offered on three vessels for 1½ years, the fears appear to be unfounded, in our view.

Figure 58: Sapura Navegação Marítima SA's PSLV assets - commercial terms


Name of PLSV Year built Newbuilding

price

Useful life

(years)

Contract start

date

Firm contract

end

Option contract

end

Firm Option Max

US$ m

1 Sapura Diamante 2014 220.4 30 28-Jun-14 27-Jun-19 27-Jun-24 5 5 10

2 Sapura Topazio 2014 220.4 30 30-Sep-14 29-Sep-19 29-Sep-24 5 5 10

3 Sapura Onix 2015 222.1 30 4-Sep-15 3-Sep-23 3-Sep-31 8 8 16

4 Sapura Jade 2016 222.1 30 14-Feb-16 13-Feb-24 13-Feb-32 8 8 16

5 Sapura Esmeralda 2016 263.0 30 6-Apr-16 5-Apr-21 5-Apr-26 5 5 10

6 Sapura Rubi 2016 222.1 30 14-Aug-16 13-Aug-24 13-Aug-32 8 8 16

Contract period (years)


70

Figure 59: Sapura Navegação Marítima SA's PSLV assets - technical specifications


Figure 60: Key events for Sapura Seabras / Sapura Navegação Marítima - PLSV business (50% JV with Seadrill)


Name of PLSV Breadth Draught DP

capability

Accomo-

dation

Tower

height

Tower

design

loading

Carousel

storage

Lowering

depth

Lifting

capacity

Outreach Dynamic

load

capacity

Flag Shipyard

m m pax m tonnes tonnes m tonnes m tonnes

1 Sapura Diamante 29.94 8.5 DP2 120 51.26 550 4,000 3,000 250 14 550 Panama IHC Merwede

(Holland)

2 Sapura Topazio 29.94 8.5 DP2 120 51.26 550 4,000 3,000 250 14 550 Panama IHC Merwede

(Holland)

3 Sapura Onix 29.94 8.5 DP2 120 51.26 550 4,000 3,000 250 14 550 Panama IHC Merwede

(Holland)

4 Sapura Jade 29.94 8.5 DP2 120 51.26 550 4,000 3,000 250 14 550 Panama IHC Merwede

(Holland)

5 Sapura Esmeralda 24.00 6.75 DP2 100 300 2,500 3,000 50 300 Brazil OSX (Brazil)

6 Sapura Rubi 29.94 8.5 DP2 120 51.26 550 4,000 3,000 250 14 550 Panama IHC Merwede

(Holland)

Flexible pipelay capability Main crane Other features


Nov-11 In November 2011, SapuraCrest was awarded its maiden Petrobras contract worth US$1.4bn for the building, charter and operation of three similar PLSVs,

for a firm period of five years, with extension option for an additional five years (5+5 years). Two of those three vessels are being built outside Brazil and

revenue from the vessels is expected to be generated by 4Q14.

1-Mar-12 On 1 March 2012, IHC Offshore & Marine, part of IHC Merwede, and SapuraCrest signed two contracts for the design, engineering and construction of two

new 550t pipelaying vessels (Diamante & Topazio). A third contract was signed with OSX Construção Naval S.A. Brazil for the design and engineering of

a 300t pipelaying vessel (Esmeralda), as well as a large equipment package supplied by IHC Engineering Business, among others. The orders with IHC

Merwede have a total value of €450m.

OSX was hired by Sapura Navegação Marítima S/A for the construction of one PLSV (Pipe-Laying Support Vessel), for a total amount of approximately 31-May-12 On 31 May 2012, SAKP and Seadrill Limited entered into a 50:50 JV to take equal stakes in Seabras Sapura Holding, GmBH (Austria) and Seabras

Sapura Participações S.A. (Brazil). The JVs are in relation to the building, construction, ownership, and operation of three units of pipe-laying support

vessels. SAKP‟s offshore operations are being executed in Brazil for Petrobras by its Brazilian joint venture company Sapura Navegacao Maritima

(Brazil), a 50:50 venture with offshore drilling company Seadrill Limited.

27-Jun-13 On 27 June 2013, SAKP won a new award worth US$2.7bn from Brazil¹s Petrobras to build, charter and operate three deepwater flexible pipe laying

support vessels (PLSVs) for a firm period of eight years, with extension option for an additional eight years (8+8 years). The new contract was awarded to

SapuraKencana‟s associate company, Sapura Nevegacao Maritima S.A. Brazil (SNM).

The PLSVs are due to be delivered for operation from around 2Q16. The new PLSVs will be capable of laying flexible pipelines in up to 3,000 metres water

depth offshore Brazil. The PLSVs will be fitted with world class Remotely Operated Vehicles (ROVs) developed and built by Sapurakencana's Australian

subsidiary, Total Marine Technology Pty Ltd.

SapuraKencana's joint venture company in Brazil already employs more than 300 people to provide offshore support services and work as offshore crew.

Training and development is being provided continuously to upgrade local employee skills and there are plans to ramp up the number of workers to around

1,000 by the year 2016 when all contracted PLSVs are delivered and are in full operation.

9-Aug-13 On 9 August 2013, IHC Merwede announced that it had secured orders worth more than €1bn for a total of six pipelaying vessels - three ordered by Subsea

7, and three ordered by Seabras Sapura . All six are 550-tonne vessels, suggesting that the price of each ship cost €167m.

Sep-13 The Sapura Diamante was launched from IHC Merwede in September 2013.

20-Feb-14 On 20 February 2014, SAKP's second pipe laying support vessel, the Sapura Topazio, built specifically for service with Petrobras in Brazil, was launched

in the Netherlands. The 550-tonne vessel, ordered by Sapura Navegação Marítima, a Brazil-based joint venture between SapuraKencana and Seadrill, is the

second in a series of six fully integrated offshore vessels in whose construction IHC Merwede is involved in.

28-Jun-14 On 28 June 2014, SAKP's new PLSV Sapura Diamante started work for Petrobras, more than three months ahead of the original contractual delivery date.

It was delivered on 28 May 2014.

21-Apr-15 On 21 April 2015, the Sapura Ônix was delivered.

14-Feb-16 On 14 February 2016, the fourth PLSV, Sapura Jade commenced work with Petrobras on schedule in Brazil. Sapura Jade is equipped with a 550 tonne

vertical (tiltable) lay system for the deployment of a range of flexible products in up to 3,000 metres water depth for Petrobras‟ pre-salt developments offshore

Brazil. It is also fitted with world class Remotely Operated Vehicles (ROVs) developed and built by SapuraKencana‟s Australian subsidiary, Total Marine

Technology Pty Ltd.

6-Apr-16 On 6 April 2016, the Sapura Esmeralda was delivered and began operations with Petrobras. The 300-tonne Sapura Esmeralda was originally ordered at the

OSX shipyard in Brazil, but financial problems at the oil services company led Sapura Navegacao to transfer construction of the unit to the IHC Merwede

shipyard in Netherlands. IHC Merwede will later transfer the PLSV to Brazil, where final commissioning and work will take place at the OSX shipyard.

14-Aug-16 On 14 August 2016, SAKP's sixth and final PSLV, Sapura Rubi was delivered on schedule to Petrobras and the vessel commenced work in Brazil. The 550-

tonne vessel is equipped with a pipelaying spread, and two below-deck storage carousels, with capacities for 2,500 tonnes and 1,500 tonnes of product

respectively. The tower orientation allows for maximum deck space while utilising a high-capacity 610 tonnes abandonment and recovery system. Sapura

Rubi is also fitted with world class Remotely Operated Vehicles (ROVs) developed and built by SapuraKencana‟s Australian subsidiary, Total Marine

Technology Pty Ltd.


71

Assumptions for SNM

Two PLSVs entered deployment in FY15, one vessel in FY16, and three vessels in FY17F, with Sapura Rubi the last one to commence commercial deployment on 14 August 2016. Hence, we expect FY18F will see full-year contributions from all six vessels.

Assuming the worst-case scenario that none of the PLSV contracts will be renewed beyond the firm period, Sapura Diamante and Sapura Topazio will see their contracts end in FY20F, while Sapura Esmeralda‟s contract will end during FY22F.

As this appears unrealistic, we have assumed that SNM will continue to find employment for its vessel fleet beyond the firm charter, and for the overall fleet commercial utilisation to be at 80%, or higher, for all forecast years. Factoring in technical utilisation at 99% brings the actual utilisation to 79% or higher.

We have also assumed that contracts will be renewed at US$270,000/day, and estimated cash operating costs to remain at approximately US$160,000/day, with idled PLSVs incurring lay-up costs of US$1,000/day.

Based on estimates from our internal analysis, we gather that 80% of oilfields in the Santos Basin are viable for development at oil prices of US$60/bbl and below, and about 50% of oilfields would be viable at US$50/bbl and below. We believe SAKP is confident that Petrobras will renew the charters for SNM‟s six PLSVs into their option periods.

However, if this fails to materialise, we believe there may be opportunities for SNM to redeploy the vessels to future West African deepwater developments, which we expect to materialise in the next five years or so.

P&L forecasts for SNM

Our profit forecasts for SNM have been set out below, in US$ terms. Note that SAKP accounts for SNM on the JV line, taking its 50% share of profits.

EBITDA margins are high, in the high-30s, and rising to above 40% in the forecast years once all six assets are fully deployed. We have depreciated the assets over their 30-year useful life, and calculated interest expense on the assumption of 80:20 debt-to-equity financing, 8-10 year amortising loans, and interest rate of 2% p.a.

We have also factored in tax expense at 15% of revenue. Tax is paid only on the Brazilian real portion of revenue, which represents to operating costs. Bareboat charter revenue is not subject to tax.


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Figure 61: Key assumptions - PLSV segment




Number of PLSVs 0 0 0 2 3 6 6 6 6 6 6 6 6

TOP DOWN ASSUMPTIONS

Available PLSV calendar days 0 0 0 342 880 1,922 2,190 2,190 2,190 2,190 2,190 2,190 2,190

Charter contract days 342 880 1,895 2,161 2,161 1,828 1,734 1,734 1,734 1,734

Overall utilisation rates (%) 100% 100% 99% 99% 99% 83% 79% 79% 79% 79%

Charter contract rates (US$/day) 270,000 276,906 278,386 278,232 282,897 285,249 286,067 293,434 295,000 291,575

Cash operating cost - (US$/day) 168,505 168,505 160,000 160,000 160,000 135,315 128,200 128,200 128,200 128,200

- Operating PLSV 168,505 168,505 160,000 160,000 160,000 160,000 160,000 160,000 160,000 160,000

- Cold-stacked PLSV 0 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000

Revenue over total capacity (US$/day) 264,852 272,434 274,542 274,522 279,125 238,046 226,565 232,400 233,640 230,928

Less: Cash operating cost (US$/day) -168,505 -168,505 -160,000 -160,000 -160,000 -135,315 -128,200 -128,200 -128,200 -128,200

PLSV cash profits (US$/day) 96,347 103,929 114,542 114,522 119,125 102,731 98,365 104,200 105,440 102,728

Less: Depreciation cost (US$/day) -20,132 -20,158 -20,754 -20,856 -20,856 -21,038 -21,312 -21,677 -21,951 -21,951

PLSV EBIT (US$/day) 76,216 83,771 93,788 93,666 98,270 81,693 77,053 82,522 83,489 80,776

BASED ON ACTUAL CONTRACTS

Charter contract days 342 880 1,922 2,190 2,190 1,850 1,460 1,159 1,095 945

- Sapura Diamante 218 365 366 365 365 148 0 0 0 0

- Sapura Topazio 124 365 366 365 365 242 0 0 0 0

- Sapura Onix 150 366 365 365 365 365 365 365 215

- Sapura Jade 352 365 365 365 365 365 365 365

- Sapura Esmeralda 301 365 365 365 365 64 0 0

- Sapura Rubi 171 365 365 365 365 365 365 365

Charter contract rates (US$/day) 270,000 276,906 278,386 278,232 282,897 285,249 289,281 305,424 310,000 310,000

- Sapura Diamante 270,000 270,000 270,000 270,000 270,000 270,000 0 0 0 0

- Sapura Topazio 270,000 270,000 270,000 270,000 270,000 270,000 0 0 0 0

- Sapura Onix 310,000 303,025 300,700 310,000 310,000 310,000 310,000 310,000 310,000

- Sapura Jade 303,025 300,700 310,000 310,000 310,000 310,000 310,000 310,000

- Sapura Esmeralda 227,123 227,123 227,123 227,123 227,123 227,123 0 0

- Sapura Rubi 300,700 300,700 310,000 310,000 310,000 310,000 310,000 310,000

Commercial utilisation rates (%) 100.0% 100.0% 100.0% 100.0% 100.0% 84.5% 66.7% 52.9% 50.0% 43.2%

- Sapura Diamante 100.0% 100.0% 100.0% 100.0% 100.0% 40.5% 0.0% 0.0% 0.0% 0.0%

- Sapura Topazio 100.0% 100.0% 100.0% 100.0% 100.0% 66.3% 0.0% 0.0% 0.0% 0.0%

- Sapura Onix 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 58.9%

- Sapura Jade 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

- Sapura Esmeralda 100.0% 100.0% 100.0% 100.0% 100.0% 17.5% 0.0% 0.0%

- Sapura Rubi 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%


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Figure 62: PLSV P&L (US$ m)




Revenue (US$ m) 90.6 239.7 527.7 601.2 611.3 521.3 496.2 509.0 511.7 505.7

Less: Direct costs -57.6 -148.3 -307.5 -350.4 -350.4 -296.3 -280.8 -280.8 -280.8 -280.8

EBITDA (US$ m) 33.0 91.5 220.1 250.8 260.9 225.0 215.4 228.2 230.9 225.0

EBITDA margin (%) 36.4% 38.1% 41.7% 41.7% 42.7% 43.2% 43.4% 44.8% 45.1% 44.5%

Less: Depreciation -6.9 -17.7 -39.9 -45.7 -45.7 -46.1 -46.7 -47.5 -48.1 -48.1

EBIT (US$ m) 26.1 73.7 180.3 205.1 215.2 178.9 168.7 180.7 182.8 176.9

Less: Interest expense -4.3 -8.2 -18.4 -18.5 -16.6 -13.5 -9.8 -6.2 -4.3 -3.0

PBT (US$ m) 21.7 65.5 161.9 186.7 198.6 165.4 158.9 174.6 178.6 173.9

Less: Tax (15% on rev) -13.6 -36.0 -79.2 -90.2 -91.7 -78.2 -74.4 -76.3 -76.8 -75.9

PAT (US$ m) 8.1 29.6 82.7 96.5 106.9 87.2 84.5 98.2 101.8 98.0


74

SWOT ANALYSIS

Figure 63: SWOT Analysis


Strengths

SAKP has a strong position in the tender drilling space, with 50% global market share. The tender drilling rig market is less competitive, with slower fleet growth and fewer speculative orders. Tender rigs are wholly positioned in the production drilling space; oilfield operators typically continue to perform production drilling even in weak oil price environments.

In the energy business, SAKP has signed a very profitable SK310 B15 gas sales agreement with Petronas, which we believe suggests that a future SK408 gas sale agreement is not just probable but also likely to be similarly profitable. With significant SK408 gas discoveries post the acquisition of Newfield, SAKP has created value with the acquisition despite the significant oil price decline.

SAKP is well equipped for cross-selling opportunities, in our view, and can undertake complete end-to-end, integrated Engineering, Procurement, Construction, Installation and Commissioning (EPCIC) work. In the engineering and construction (E&C) space, SAKP has one of the biggest fabrication yards in Malaysia at Lumut, with a long track record of successful execution. It also has a fleet of derrick lay vessels, diving support vessels, accommodation barges and AHTS, a construction vessel and a floatover launch barge and other marine assets for use in Inspection, Repair and Maintenance (IRM) jobs, Hook-Up and Commissioning (HUC) jobs and Transportation and Installation (T&I) jobs.

SAKP also has a successful JV with Seadrill owning and operating a fleet of six Pipe Lay Support Vessels (PLSV) on charter to Petrobras in Brazil. These contracts are long-term in nature and very profitable, with evidently little risk of cancellation or contract renegotiation by Petrobras.

Weaknesses

The oil blocks in Peninsular Malaysia are loss-making at today‟s crude oil price and have already entered a steep production decline. SAKP is drilling more production wells at its primary block, PM323, in an attempt to capture as much of the reserves as possible before the well pressure dissipates. However, we expect production to end in the not-too-distant-future, i.e. FY21F.

Most of SAKP‟s E&C orderbook will be completed in the next 12 months and if it fails to secure more contracts, SAKP will have to trim headcount to match costs with the volume of available work, in our view.

As SAKP is a Malaysian-based entity, contracts from Petronas and other PSC contractors in Malaysia have been a significant source of work in the past. Hence, a reduced volume of work from Petronas has required SAKP to compete more aggressively for price-competitive work in international markets.

Strengths Opportunities

About 50% market share in the tender rig market which has limited supply growth. About 9-10 Tcf of gas have been discovered offshore Sarawak awaiting development.

Very profitable B15 gas sale contract despite low oil prices. Additional exploration drilling at SK408 may yield more discoveries.

Integrated EPCIC business model which allows for cross-selling opportunities. Petronas may increase the volume of drilling work in 2017, after cutting for two years.

Long-term PLSV contracts remain intact and very profitable. Partnership with Seadrill in Brazil could yield more contracts in the future.

Weaknesses Threats

Oil blocks in Peninsular Malaysia have entered a steep production decline. Heightened competition from the oversupplied jack-up rig market for exploration work.

SAKP will need to trim headcount to match costs with volume of available work. Energy revenue could be impacted directly if oil prices dip further.

Reduced volume of work from Petronas will require SAKP to compete more Weak contracting environment may impact utilisation of the Lumut fabrication yard.

aggressively for price-competitive work in international markets. Lower utilisation of rig, derrick lay, and survey vessels due to the oil price downturn.


75

Opportunities

As much as 9-10 trillion cubic feet of gas has been discovered in the SK310 and SK408 gas blocks offshore Sarawak and are awaiting development. Once these come online, we believe SAKP‟s energy division has the potential to be a major profit contributor to the group as a whole.

SAKP plans to perform more exploration drilling in SK408 in the next financial year and beyond given that past drilling has been very successful. If significant discoveries are made, we think the importance of the energy division to the group will be augmented further.

With the potential for oil prices to rise in 2017 as a result of the OPEC and non-OPEC production cuts, oil majors like Petronas may decide to increase their capex on production drilling activity in order to take advantage of the higher prices. Petronas had been very quiet all through 2016 on the drilling front, hence an increase in drilling capex next year is a distinct possibility, in our view.

SAKP‟s partnership with Seadrill in Brazil had given the former the chance to penetrate new markets like Brazil for pipe-laying work. The partnership may yield more contracts in the future as Brazil has plenty of deepwater fields to develop and so does West Africa in the future.

Threats

The jack-up rig market is heavily oversupplied and, to the extent that jack-up rigs can also perform production drilling, it has had the power to affect the utilisation and day rate levels of tender rigs. This is why we have factored in relatively modest utilisation rates and day rate levels in the next few years for SAKP‟s tender rig business.

Needless to say, lower oil prices have a direct impact on the profitability of SAKP‟s energy business. Production cuts organised by OPEC and non-OPEC nations are currently planned for only the first six months of 2017 and there is no assurance that each country will comply strictly with its stated commitment to cut output and sales. In addition, we think shale oil output in the US appears to be headed for a recovery, with rig counts increasing in the past few months.

Even if oil prices recover somewhat, we believe oil majors may continue to wait for a healthier balance in the demand and supply of oil before they are prepared to open the spigot of major field development capex spending. As such, we think SAKP‟s Lumut fabrication yard may continue to see relatively weak utilisation rates for some time to come.

Meanwhile, lower oil prices also have had the effect of lowering the utilisation of SAKP‟s derrick lay vessels, tender drilling rigs, survey vessels and other marine assets. We expect the recovery in utilisation and, especially, charter rates may be a long drawn-out affair.


76

RISKS

SAKP will need to refinance maturing debt

Most of SAKP‟s debt is for seven years‟ duration, during which the group‟s cashflows may be impacted by weak drilling rates and utilisation levels as well as the high capex required to develop SK310 B15 and SK408. In addition, there is ongoing maintenance capex on the rigs and marine assets. As such, we believe SAKP will need to refinance ongoing debt and eventual maturities.

If earnings at the E&C, energy and drilling businesses remain weak, there is the risk that SAKP may breach its net debt-to-EBITDA and net gearing covenants, although we believe a company of SAKP‟s stature can probably renegotiate the covenants with relative ease.

Contract pricing may come under renewed pressure

Charter rates for SAKP‟s tender drilling rigs and the rates at which SAKP can charge for fabrication, IRM, HUC and T&I work may decline further if oil majors continue to be restrained on development capex spending, even if oil prices stage a recovery.

Crude oil prices could decline further

In an environment of weak global demand growth, better-than-expected resilience of US shale oil producers, rising Iranian oil output and potential shortfall in compliance with the recent effort to curb oil production, we believe crude oil prices may renew their decline, affecting oil and gas field earnings and potentially causing oilfield operators to maintain a low level of drilling capex for an extended period of time.


77

FINANCIALS

Recent financial performance

In the most recent 3QFY17 results, SAKP delivered a core net profit that was 64% lower yoy.

Core PBT at the E&C business fell 38% yoy on 14.5% lower revenue and a decline in margins. Without the higher profit contribution from the PLSV business in Brazil, the PBT decline would have been larger.

The drilling business saw its core PBT decline 62% yoy as a result of a 21.1% pt decline in utilisation rates to just 53.9% and a 16.8% yoy drop in average day rates to US$124k/day.

The energy business‟s core PBT dropped 74% yoy as a result of lower oil production and a lower lifting price and because the contribution from the Berantai RSC was negligible in the quarter as the termination took effect on 30 September 2016.

The reported net profit, however, was 22% higher yoy, mainly because SAKP had made asset impairment provisions in the previous fiscal year‟s 3Q. No asset impairments have so far been made in FY17F.

Figure 64: Results comparison


FYE Jan (RM m) 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17

Revenue 2,410.2 2,394.5 2,258.2 2,803.5 2,890.8 2,231.5 1,941.4 1,675.3 2,221.7

Operating costs (1,650.3) (1,736.9) (1,462.1) (1,851.8) (2,048.5) (1,751.0) (1,362.2) (1,112.7) (1,694.0)

EBITDA 759.9 657.6 796.1 951.7 842.3 480.6 579.3 562.6 527.7

EBITDA margin (%) 31.5 27.5 35.3 33.9 29.1 21.5 29.8 33.6 23.8

Depn & amort. (264.5) (476.3) (337.6) (321.0) (405.7) (344.6) (321.8) (287.9) (262.1)

EBIT 495.4 181.3 458.5 630.8 436.7 135.9 257.5 274.7 265.7

Interest expense (171.9) (153.1) (179.7) (173.0) (196.4) (211.2) (192.7) (195.1) (190.9)

Interest & invt inc 20.6 (12.3) 14.3 101.7 134.3 88.3 (20.0) 3.3 33.5

Associates' contrib 63.8 59.1 43.2 41.5 88.9 16.7 79.9 57.0 91.0

Exceptionals 3.1 (35.7) - (539.9) (265.5) (1,337.9) - 36.9 -

Pretax profit 411.0 39.3 336.3 61.1 198.0 (1,308.1) 124.6 176.7 199.3

Tax (62.9) 89.9 (75.1) 43.1 (68.1) 21.3 (14.6) (65.0) (41.8)

Tax rate (%) 15.3 (228.8) 22.3 (70.6) 34.4 1.6 11.7 36.8 21.0

Minority interests 0.3 (0.0) (0.5) (0.2) (0.1) 0.7 0.3 0.6 0.6

Net profit 348.4 129.1 260.7 104.1 129.9 (1,286.2) 110.3 112.3 158.1

Core net profit 385.7 71.6 255.0 482.6 445.7 16.7 110.0 77.9 159.5

EPS (sen) 5.8 2.2 4.4 1.7 2.2 (21.5) 1.8 1.9 2.6

Core EPS (sen) 6.4 1.2 4.3 8.1 7.4 0.3 1.8 1.3 2.7

Breakdown of exceptionals 3.1 (35.7) - (539.9) (265.5) (1,337.9) - 36.9 -

- Prov for impairment on receivables 3.1 (11.2) - - (0.9) - - - -

- Prov for impairment on investment - - - - (28.3) - - - -

- Gain/(loss) on disposal of PPE - (6.4) - - - - - - -

- Impairment on PPE and oil and gas prop - (54.9) - (539.9) (317.3) (1,143.8) - - -

- Deposit on acq of O&G assets w/o - - - - - (172.5) - - -

- Intangibles w/o - customer contracts - - - - - (21.6) - - -

- Changes in provision - - - - 80.9 - - - -

- Gain from acq of subsidiaries - 36.9 - - - - - - -

- Berantai cessation - - - - - - - 36.9 -


78

Figure 65: Segmental breakdown


Figure 66: Drilling metrics



Revenue (RM m) 2,410.2 2,394.5 2,258.2 2,803.5 2,890.8 2,231.5 1,941.4 1,675.3 2,221.7

Engineering & construction 1,302.9 1,189.9 1,101.1 1,638.8 1,833.1 1,073.1 1,024.4 796.7 1,566.5

- Fabrication, Hook-up & Commissioning 503.3 668.4 - - - - - - -

- Offshore Construction & Subsea Svs 799.6 521.5 - - - - - - -

Drilling & Energy Svs 1,117.0 1,212.5 1,185.8 1,233.8 1,101.0 1,034.8 920.4 891.0 656.9

- Drilling 664.7 799.6 770.2 783.8 693.9 707.9 623.3 537.7 460.4

- Energy 452.4 412.9 415.6 449.9 407.2 326.9 297.1 353.3 196.5

Eliminations & others - - - - - - - - -

Profit before tax (RM m) 411.0 39.3 336.3 61.1 198.0 (1,308.1) 124.6 176.7 199.3

Engineering & construction 242.8 171.3 187.4 330.5 441.1 128.5 78.6 120.1 274.1

- Fabrication, Hook-up & Commissioning 70.7 72.4 - - - - - - -

- Offshore Construction & Subsea Svs 172.1 98.8 - - - - - - -

Drilling & Energy Svs 265.0 160.8 257.9 286.4 96.4 119.5 153.0 66.0 35.8

- Drilling 146.5 171.0 198.6 222.5 89.6 133.6 151.6 50.3 34.0

- Energy 118.5 (10.3) 59.4 63.9 6.9 (14.0) 1.4 15.7 1.8

Impairments - (54.9) - (539.9) (317.3) (1,143.8) - - -

- Engineering & Construction - - - - (58.8) (144.0) - - -

- Drilling - - - - (118.7) (282.2) - - -

- Energy - (54.9) - (539.9) (139.8) (717.6) - - -

Other exceptional items - - - - 52.7 (194.1) - 36.9 -

- Engineering & Construction - - - - (28.3) - - - -

- Drilling - - - - 80.9 (21.6) - - -

- Energy - - - - - (172.5) - 36.9 -

Corporate exp & eliminations (96.9) (237.8) (109.0) (15.8) (74.9) (218.2) (107.0) (36.3) (110.6)


Number of rigs 16 16 16 16 16 16 16 16 16

- Tender barges 9 9 9 9 9 9 9 9 9

- Semi-tenders 7 7 7 7 7 7 7 7 7

Drilling calendar days 1,440 1,472 1,424 1,472 1,472 1,472 1,440 1,472 1,472

- Tender barges 796 828 801 828 828 828 810 828 828

- Semi-tenders 644 644 623 644 644 644 630 644 644

Days employed 1,288 1,330 1,256 1,224 1,104 1,021 990 882 793

- Tender barges 644 734 712 736 736 653 630 479 460

- Semi-tenders 644 596 544 488 368 368 360 403 333

Utilisation rate 89.4% 90.4% 88.2% 83.2% 75.0% 69.4% 68.8% 59.9% 53.9%

- Tender barges 80.9% 88.6% 88.9% 88.9% 88.9% 78.9% 77.8% 57.9% 55.6%

- Semi-tenders 100.0% 92.5% 87.3% 75.8% 57.1% 57.1% 57.1% 62.6% 51.7%

Charter rates (US$/day) 165,111 165,114 162,434 154,758 149,403 149,269 147,942 138,052 124,351

- Tender barges 130,977 135,516 135,605 135,605 135,605 133,641 131,337 120,521 119,000

- Semi-tenders 199,245 201,564 197,548 183,645 177,000 177,000 177,000 158,888 131,742


79

Figure 67: Energy metrics


Figure 68: Engineering & Construction revenue and core PBT trends (RM m)


Figure 69: Drilling revenue and core PBT trends (RM m)



PSC revenue (US$ m) 87.2 77.0 73.2 80.4 60.4 37.6 41.3 60.6 36.8

- Oil 87.2 77.0 73.2 80.4 60.4 37.6 41.3 60.6 36.8

- Gas 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Annual production (mmboe) 0.890 1.222 1.262 1.237 1.286 1.016 1.088 1.262 0.800

- Oil (mmboe) 0.890 1.222 1.262 1.237 1.286 1.016 1.088 1.262 0.800

- Gas (mmboe) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

Average price

- Oil (US$/bbl) 98 63 58 65 47 37 38 48 46

- Gas (US$/mmbtu) na na na na na na na na na

Title:

Source:


0

500

1,000

1,500

2,000

2,500

0

50

100

150

200

250

300

350

400

450

500

1QFY13

2Q 3Q 4Q 1QFY14

2Q 3Q 4Q 1QFY15

2Q 3Q 4Q 1QFY16

2Q 3Q 4Q 1QFY17

2Q 3Q

E&C core PBT (RM m) - LHS E&C revenue (RM m)

Title:

Source:


0

100

200

300

400

500

600

700

800

900

0

50

100

150

200

250

1Q FY15 2Q 3Q 4Q 1Q FY16 2Q 3Q 4Q 1Q FY17 2Q 3Q

Drilling core PBT (RM m) - LHS Drilling revenue (RM m)


80

Figure 70: Energy revenue and core PBT trends (RM m)


Asset impairments

As a consequence of the fall in oil prices, SAKP made significant asset impairments in FY16.

During 2QFY16, SAKP impaired RM539.9m of its Oil & Gas Properties.

During 3QFY16, a further RM139.8m of Oil & Gas Properties was impaired, in addition to RM58.8m impairment of E&C fixed assets and RM118.7m in Drilling fixed assets.

SAKP made very significant asset impairments in its 4QFY16 results amounting to RM1,337.9m. This comprised of:

RM144m impairment on E&C fixed assets,

RM282.2m impairment on Drilling fixed assets,

RM717.6m impairment on Expenditure on Oil & Gas Properties,

RM172.5m write-off of deposits that had been placed with Petronas for the proposed acquisition of several oil blocks in Vietnam, which SAKP had decided to abandon, and

RM21.6m write-off of intangibles in the Drilling business.

In total, during FY16, SAKP impaired RM1.4bn in Oil & Gas Properties, RM203m in E&C fixed assets and RM423m in Drilling fixed assets and intangibles.

The impairment against the Oil & Gas Properties was mainly on the back of a downward revision in the forward oil price curve. SAKP employs a third-party energy consultant to value its oil and gas reserves every year.

With oil prices now on a recovery path, we suspect that SAKP will not make any further impairment charges in FY17F. We believe there may even be the possibility of some impairment writeback, although we rate the probability of this taking place as low.

Title:

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0

100

200

300

400

500

600

700

800

-50

0

50

100

150

200

250

300

350

400

1Q FY15 2Q 3Q 4Q 1Q FY16 2Q 3Q 4Q 1Q FY17 2Q 3Q

Energy core PBT (RM m) - LHS Energy revenue (RM m)


81

Figure 71: At its 4QFY16 results ending 31 January 2016, SAKP used a lower forward oil price curve to value its oil and gas

properties, resulting in a large impairment charge


Figure 72: Brent crude oil price (US$/barrel)


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Source:


0

20

40

60

80

100

120

140

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Brent price (US$/bbl)


82

Accounting for Berantai cessation

These are the likely accounting entries recognised by SAKP at its 2QFY17 results in relation to the Berantai RSC termination effective 30 September 2016. All figures are in RM unless otherwise stated.

1. To recognise a net income of RM1.3bn in P&L from the termination of Berantai RSC, representing early settlement of unrecovered capex and opex that had been incurred for the operations of the oilfield. This includes the RM763.8m payable to 49%-owned Berantai Floating Production Limited as compensation for early termination of the FPSO charter.

Dr. Trade and other receivables (B/S) 1,314,594,000

Dr. Accrued payable (B/S) 21,894,000

Cr. Other operating income (P&L) 1,336,488,000

2. To recognise compensation for early termination of the FPSO charter to 49%-owned Berantai Floating Production Limited; this is the amount received by SAKP from Petronas and then passed through to the JV company.

Dr. Operating expenses (P&L) 763,767,000

Cr. Trade and other payables (B/S) 749,409,000

Cr. Prepayments (B/S) 14,358,000

3. To fully depreciate the assets at the Berantai field, i.e. pipelines, wellhead, wellhead platform (excluding the FPSO Berantai because the FPSO is accounted for as a JV).

Dr. Depreciation & amortisation (P&L) 607,412,000

Cr. Expenditure on O&G properties (B/S) 592,411,000

Cr. Other assets (B/S) 15,001,000

4. To recognise the present value accretion arising from the full settlement of the Lease Receivable balance in the books of 49%-owned Berantai Floating Production Limited.

Dr. Investment in JV (B/S) 81,570,000

Cr. Share of profit from JV (P&L) 81,570,000

5. To account for the tax effect of the Berantai RSC cessation.

Dr. Tax expense (P&L) 10,000,000

Cr. Tax payable (B/S) 10,000,000

The net effect of the above is a credit to the P&L of RM36.9m in 2QFY17, which we have classified as an exceptional item.


83

Detailed P&L forecasts

Figure 73: SAKP Group P&L (FYE Jan) - RM m


FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY20F FY21F FY22F FY23F FY24F

CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16F CY17F CY18F CY19F CY20F CY21F CY22F CY23F

Revenue 3,656 4,650 4,336 4,428 4,544 6,912 8,379 9,943 10,184 7,701 6,762 7,108 6,713 6,668 7,280 9,247 9,650

Engineering & Construction 1,509 2,508 2,360 2,284 2,147 5,697 5,540 5,221 5,646 4,648 4,017 4,325 4,000 4,000 4,500 5,000 5,000

Drilling & Energy Svs 753 943 897 896 409 1,215 3,042 4,893 4,555 3,074 2,765 2,803 2,733 2,688 2,800 4,267 4,670

- Drilling 753 943 897 896 409 419 2,739 2,956 2,084 1,807 1,714 1,483 1,867 1,953 1,965 2,594

- Energy 0 0 0 0 0 796 2,154 1,600 990 957 1,089 1,251 820 847 2,302 2,076

Eliminations 0 0 0 0 0 0 -203 -1,096 -17 -20 -20 -20 -20 -20 -20 -20 -20

Direct cost -3,123 -3,901 -3,506 -3,559 -3,451 -5,826 -6,558 -6,887 -7,132 -5,464 -4,805 -5,082 -4,657 -4,703 -5,210 -6,081 -6,221

EBITDA 532 749 830 869 1,093 1,087 1,821 3,056 3,052 2,238 1,957 2,025 2,056 1,965 2,070 3,167 3,428

EBITDA margin (%) 15% 16% 19% 20% 24% 16% 22% 31% 30% 29% 29% 28% 31% 29% 28% 34% 36%

Depreciation /

Amortisation

-86 -98 -109 -111 -124 -261 -635 -1,290 -1,409 -1,241 -1,314 -1,279 -1,252 -1,181 -1,240 -1,595 -1,482

- Depreciation of PPE -77 -84 -91 -90 -94 -227 -501 -715 -930 -876 -896 -885 -871 -948 -1,010 -1,010 -1,010

- Amort. of intangible

assets

0 0 0 0 -2 -9 -13 -39 -34 -33 -32 0 0 0 0 0 0

- Amort. of expenses on

O&G properties

0 0 0 0 0 -25 -120 -535 -445 -332 -385 -394 -381 -233 -231 -585 -472

EBIT (operating profit) 446 650 722 758 969 826 1,186 1,766 1,643 997 644 746 804 784 830 1,572 1,946

EBIT Margin (%) 12% 14% 17% 17% 21% 12% 14% 18% 16% 13% 10% 10% 12% 12% 11% 17% 20%

Other income 0 0 0 0 0 14 11 34 18 10 10 10 10 10 10 10 10

Net foreign exchange

gain/(loss)

-8 0 -28 -45 32 -15 209 -1 321 0 0 0 0 0 0 0 0

Int rev 12 11 7 9 29 32 17 15 18 30 35 40 46 45 53 53 50

Int exp -84 -67 -57 -53 -92 -227 -444 -667 -760 -760 -754 -766 -728 -721 -715 -695 -580

Profit before associates 366 595 643 669 938 630 979 1,147 1,240 277 -65 30 131 118 178 940 1,426

Margin (%) 10% 13% 15% 15% 21% 9% 12% 12% 12% 4% -1% 0% 2% 2% 2% 10% 15%

Associates / JVs -15 -45 47 101 84 135 235 252 190 258 222 250 219 218 246 259 251

Engineering & Construction 97 182 148 143 214 232 260 219 218 246 259 251

Drilling & Energy Svs 39 52 104 47 45 -10 -10 0 0 0 0 0

Exceptionals 4 5 -6 5 22 65 -6 217 -2,143 439 127 0 349 0 0 0 0

- Unrealised forex

translation on debt

-365 396 843

- Unrealised translation on

for curr assets

768 -269 -494

- Impairment on PPE and

oil and gas prop

-55 -2,001

- Deposit on acq of O&G

assets w/o

-173

- Gain from acq of

subsidiaries

1 58 215 0

- Berantai cessation 37

- Others 4 5 -6 5 21 7 -6 57 31 0 0 0 0 0 0 0 0

PBT 355 556 685 776 1,044 830 1,208 1,616 -713 975 284 280 699 337 425 1,198 1,677

Engineering & Construction 132 125 68 105 614 828 637 924 1,087 622 545 626 528 518 628 734 753

Drilling & Energy Svs 158 272 349 310 29 275 969 1,262 760 287 -21 19 174 171 140 803 1,246

- Drilling 158 272 349 310 29 0 0 635 644 285 -5 -60 -216 -29 -32 -13 492

- Energy 0 0 0 0 0 0 0 627 116 1 -16 79 390 200 172 816 755

Impairments on PPE 0 0 0 0 0 0 0 -55 -2,001 0 0 0 0 0 0 0 0

Other exceptional items 0 0 0 0 0 0 0 64 -141 37 0 0 0 0 0 0 0

Corporate expenses and

eliminations

0 0 0 0 0 -273 -398 -515 -418 29 -240 -365 -3 -352 -343 -339 -322

PBT ex-exceptionals 351 551 690 771 1,021 765 1,214 1,399 1,430 536 157 280 350 337 425 1,198 1,677


84

Figure 74: SAKP Group P&L (FYE Jan) - RM m (continued)


We are forecasting SAKP to deliver core net profits of RM385m in FY17F, down 68% yoy, as a result of a steep decline in operating profit at all divisions.

We expect the group performance to weaken even more in FY18F, with core net profits falling to a low of only RM70m – the lowest ever in the past decade. This is mainly because we expect both the drilling and energy businesses to record losses. We expect drilling to come under more intense pressure in FY18F as existing contracts roll off and incoming contracts are priced at lower day rates. Energy benefitted from the profitability of the Berantai RSC during FY17F (at least until 30 September 2016); without Berantai, the underlying losses of the Peninsular Malaysia oil blocks would become apparent.

We believe FY19F core net profit should recover somewhat from the stronger energy performance once the B15 field begins producing in earnest and with maiden gas volumes from the Gorek and Larak fields in SK408. We also think the E&C division may do better. However, these better performances may be partially offset by our forecast for a larger drilling loss on the expiry of even more contracts.

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY20F FY21F FY22F FY23F FY24F

CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16F CY17F CY18F CY19F CY20F CY21F CY22F CY23F

PBT 355 556 685 776 1,044 830 1,208 1,616 -713 975 284 280 699 337 425 1,198 1,677

PBT margin (%) 10% 12% 16% 18% 23% 10% 12% 14% -9% 9% 1% 0% 7% 2% 2% 10% 15%

Core PBT margin (%) 8% 9% 10% 9% 14% 9% 12% 12% 12% 9% 1% 0% 7% 2% 2% 10% 15%

Engineering &

Construction

9% 5% 3% 5% 29% 13% 8% 15% 17% 9% 8% 8% 8% 7% 8% 10% 10%

Drilling & Energy Svs 21% 29% 39% 35% 7% 23% 30% 24% 16% 8% 0% 1% 6% 6% 5% 19% 27%

- Drilling 21% 29% 39% 35% 7% 23% 22% 14% 0% -4% -15% -2% -2% -1% 19%

- Energy 24% 4% -4% -1% 8% 31% 24% 20% 35% 36%

PBT ex-exceptionals 351 551 690 771 1,021 765 1,214 1,399 1,430 536 157 280 350 337 425 1,198 1,677

Tax -55 -66 -65 -83 -143 -166 -84 -183 -79 -161 -97 -132 -215 -159 -184 -479 -270

- Current tax -51 -74 -68 -80 -136 -171 -177 -284 -230 -151 -87 -122 -205 -149 -174 -469 -260

- Deferred tax -4 7 3 -2 -7 5 93 102 152 -10 -10 -10 -10 -10 -10 -10 -10

Effective tax rate (%) -15% -11% -10% -12% -15% -26% -9% -16% -6% -58% 148% -434% -164% -134% -103% -51% -19%

Profit before MI 300 489 619 693 901 664 1,124 1,433 -791 814 188 148 485 178 241 720 1,407

MI -73 -134 -163 -143 -164 -139 -37 -1 0 0 0 0 0 0 0 0 0

Attributable profit 228 355 456 550 736 525 1,087 1,433 -792 814 188 148 485 178 241 720 1,407

FD/Core Net Profit

Attributable profit 228 355 456 550 736 525 1,087 1,433 -792 814 188 148 485 178 241 720 1,407

Remove: Exceptionals -4 -5 6 -5 -22 -65 6 -217 2,143 -439 -127 0 -349 0 0 0 0

+/- Tax effect on excep 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

+ Deferred tax provisions 4 -7 -3 2 7 -5 -93 -102 -152 10 10 10 10 10 10 10 10

Core net profit 227 343 459 547 721 455 1,000 1,114 1,199 385 70 158 145 188 251 730 1,417

Basic no of O/Shares 5,004 5,992 5,992 5,992 5,992 5,992 5,992 5,992 5,992 5,992 5,992 5,992

Weighted no of ordinary

shares

5,004 5,992 5,992 5,992 5,992 5,992 5,992 5,992 5,992 5,992 5,992 5,992

Basic EPS (sen) 10.48 18.14 23.91 -13.21 13.58 3.13 2.47 8.09 2.97 4.02 12.01 23.49

EPS Growth (%) 73% 32% -155% -203% -77% -21% 227% -63% 35% 199% 96%

Core EPS (sen) 9.09 16.69 18.59 20.01 6.42 1.18 2.64 2.42 3.14 4.18 12.18 23.65

Core EPS Growth (%) 84% 11% 8% -68% -82% 124% -8% 29% 33% 191% 94%


85

Bank borrowings and cash balances

All of SAKP‟s borrowings are parked under SapuraKencana TMC Sdn Bhd (SKTMC) and none of the operating units borrow in their own name. Internally, SKTMC on-lends the money to the operating subsidiaries based on their specific funding requirements.

Figure 75: SAKP movement in debt balances (FYE Jan) (RM m)


In March 2014, SKTMC entered into a facilities agreement with 13 domestic and international financial institutions for multi-currency credit facilities (MCF) of up to US$5.5bn (80% to be borrowed in US$ and 20% in ringgit), comprising term facilities and revolving credit facilities.

The SAKP group‟s existing term loans and revolving credits were refinanced through the MCF, in particular existing E&C borrowings and funding for the purchase consideration of the Seadrill and Newfield acquisitions.

A large chunk of the US$5.5bn MCF was for a tenure of seven years, although there was a tranche repayable over two years.

However, in order to maintain SAKP‟s status as a shariah-compliant stock, SKTMC signed up for sukuk facilities of up to RM7bn (or its equivalent in US$) in June 2015 and for Murahabah term facilities of up to US$2.1bn (or its equivalent in ringgit) in December 2015.

As a result, a portion of the US$5.5bn MCF was converted into shariah-compliant borrowings.

On 8 September 2015, SKTMC issued US$200m in sukuk borrowings. On 29 January 2016, SKTMC issued another RM176m (US$40m) in sukuk borrowings, totalling US$240m. This sum was used to partially settle the conventional borrowings. The sukuk is repayable after seven years.

FY17F FY18F FY19F FY20F FY21F FY22F FY23F FY24F

BORROWINGS SCHEDULE (RM m)

Borrowings b/f 18,329.2 17,430.8 16,854.6 18,133.7 16,255.1 17,476.6 17,777.6 16,093.9

* Payable ≤ 12 months ahead 2,091.1 3,953.4 4,464.8 5,516.0 5,999.1 6,673.2 7,304.6 5,903.3

* Payable > 12 months ahead 16,238.0 13,477.4 12,389.8 12,617.7 10,256.0 10,803.4 10,473.1 10,190.5

Short-term borrowings 1,164.6 1,193.2 1,166.1 1,166.1 1,111.9 1,111.9 1,111.9 1,111.9

Long-term term loans 17,164.6 16,237.5 15,688.5 16,967.6 15,143.3 16,364.8 16,665.7 14,982.0

* Payable ≤ 12 months ahead 926.6 2,760.2 3,298.7 4,349.9 4,887.3 5,561.4 6,192.7 4,791.5


Financing cash flows -1,263.7 -180.0 1,279.1 -1,035.1 1,221.5 301.0 -1,683.7 -2,059.0

Add/(less): Net movement in ST financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Add/(less): Principal repayments of current LT

financing

-2,293.7 -2,482.4 -2,580.2 -2,589.5 -2,706.7 -2,159.1 -1,822.9 0.0

Add/(less): Assumed incoming new LT

financing

1,030.0 2,517.5 4,577.8 3,112.4 6,108.8 5,862.3 4,509.0 2,732.5

Add/(less): Assumed principal repayments of

new LT financing

0.0 -215.0 -718.5 -1,558.0 -2,180.5 -3,402.3 -4,369.7 -4,791.5

Add: Interest expense accrual -739.3 -664.9 -553.2 -421.0 -303.8 -170.3 -98.9 -22.2

Less: Cash interest expense paid 739.3 664.9 553.2 421.0 303.8 170.3 98.9 22.2

Add/(less): Forex changes and others 365.3 -396.2 0.0 -843.4 0.0 0.0 0.0 0.0

Borrowings c/f 17,430.8 16,854.6 18,133.7 16,255.1 17,476.6 17,777.6 16,093.9 14,034.9

* Payable ≤ 12 months ahead 3,953.4 4,464.8 5,516.0 5,999.1 6,673.2 7,304.6 5,903.3 5,576.9


Short-term borrowings 1,193.2 1,166.1 1,166.1 1,111.9 1,111.9 1,111.9 1,111.9 1,111.9

Long-term term loans 16,237.5 15,688.5 16,967.6 15,143.3 16,364.8 16,665.7 14,982.0 12,923.0

* Payable ≤ 12 months ahead 2,540.2 2,580.2 2,715.8 2,706.7 2,159.1 1,822.9 0.0 0.0

* Payable > 12 months ahead 12,597.4 9,730.9 7,015.1 3,982.0 1,822.9 0.0 0.0 0.0


86

On 14 Dec 2015, SKTMC issued US$1,365m in 7-year Murabahah facilities, with the proceeds used to refinance the remaining conventional borrowings.

We estimate that SKTMC‟s borrowings have an average interest cost of around 4% p.a. There are covenants in place, mainly relating to net debt-to-EBITDA and also net debt-to-equity. We do not foresee SAKP breaching any of these covenants, even in the anticipated earnings weakness of the next few years.

In addition, we expect SAKP will have to incur capex over the next few years, comprising maintenance capex, oil/gas field development capex and newbuilding delivery capex.

Figure 76: SAKP movement in cash balances (RM m)



CASH AND CASH EQUIVALENTS (RM m)

Cash and cash equivalents b/f 1,947.5 3,591.0 2,773.9 4,488.6 3,805.5 4,340.6 5,280.2 4,432.3

Operating cash flows 2,893.8 94.7 1,141.4 675.9 1,176.0 1,175.9 1,585.5 2,528.2

- Cash from operating activities 3,567.8 1,688.4 2,025.4 1,562.0 1,965.1 2,070.3 3,166.6 3,428.3

- Working capital changes 206.4 -788.1 -36.4 1.2 35.3 -58.6 -470.6 -110.2

- Cash interest expense paid -759.9 -754.0 -765.5 -728.1 -720.5 -714.8 -695.4 -580.3

- Cash interest income received 40.5 45.0 49.9 55.6 54.8 62.9 63.4 60.2

- Taxes -161.0 -96.7 -132.0 -214.7 -158.7 -183.9 -478.5 -269.8

Investing cash flows 13.3 -731.8 -705.7 -323.9 -1,862.4 -537.3 -749.7 -208.1

- Capex (incl. special surveys and dry docking) -206.0 -83.9 -212.9 -323.9 -1,862.4 -206.0 -78.9 -208.1

- Expenditure on oil & gas properties -230.1 -648.0 -492.9 0.0 0.0 -331.3 -670.8 0.0

- Net advances to JVs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

- Dividend received from JV company 449.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0

- Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Cash and cash equivalents - net of operating

and investing cash flows

4,854.7 2,953.8 3,209.6 4,840.7 3,119.1 4,979.2 6,116.0 6,752.4

Financing cash flows (see table on borrowings) -1,263.7 -180.0 1,279.1 -1,035.1 1,221.5 301.0 -1,683.7 -2,059.0

- Net drawdown/(repayment) of borrowings

- Movement in ST borrowings 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

- Repayments of LT borrowings -2,293.7 -2,697.4 -3,298.7 -4,147.5 -4,887.3 -5,561.4 -6,192.7 -4,791.5

- New LT borrowings 1,030.0 2,517.5 4,577.8 3,112.4 6,108.8 5,862.3 4,509.0 2,732.5

Add/(less): Forex changes and others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Cash and cash equivalents c/f 3,591.0 2,773.9 4,488.6 3,805.5 4,340.6 5,280.2 4,432.3 4,693.5


87

Capital expenditure

The capex that we have assumed for the E&C business comprises maintenance capex (5-year special survey) for its diverse fleet of derrick lay vessels, accommodation barges, AHTS and diving support and construction vessels.

Capex for the drilling business is a mix of 5-year special survey capex as well as the capex to take delivery of SKD Kinabalu and SKD Raiqa in FY21F.

The capex spent on the Peninsular Malaysia oil blocks comprises the development drilling capex at PM323, some of which was already performed in FY17F, with more wells to be drilled in FY18F.

The capex on the SK310 and SK408 blocks comprises capex to develop the gas fields, including spending on development drilling, fabrication of CPPs and the laying of offshore pipes to connect the producing fields to other proximate fields for onward transfer to the Bintulu LNG liquefaction plant.

Figure 77: Capex estimates for SapuraKencana Petroleum group (FYE Jan)


Dividend policy

SAKP does not have a dividend policy. Since the merger, SAKP paid dividends only in FY15 (4.35 sen/share) and FY16 (1.35 sen/share). We believe that SAKP will continue to pay a low level of dividends to maintain its status as a dividend-paying stock and we have pencilled in a DPS of 1 sen/share for FY17F and beyond.


Capex (RM m) 206.0 83.9 212.9 323.9 1,862.4 206.0 78.9 208.1

- E&C (Marine) 33.0 8.6 34.4 57.4 49.2 32.8 8.2 32.8

- Drilling 173.0 75.3 178.5 266.5 1,813.2 173.2 70.7 175.3

Exp on O&G properties (RM m) 230.1 648.0 492.9 0.0 0.0 331.3 670.8 0.0

* PM blocks 106.5 241.9 0.0 0.0 0.0 0.0 0.0 0.0

* SK310 B15 123.6 272.5 0.0 0.0 0.0 0.0 0.0 0.0

* SK408 0.0 133.6 492.9 0.0 0.0 331.3 670.8 0.0


88

VALUATION AND RECOMMENDATION

Add recommendation; target price at RM1.87

The coverage of SAKP has been transferred to the analyst writing this report and the earnings forecasts, recommendation, target price and valuation basis have been comprehensively revised as a result.

We now have an Add recommendation on the stock, with a target price of RM1.87, based on SOP valuation.

Rationale for the Add call

The bad news is that SAKP‟s medium-term earnings outlook looks weak, in our view. SAKP achieved core net profit in excess of RM1bn in each of the three years to FY16, as a result of the orderbook accumulated prior to the oil price downturn. But we expect FY17F net profit to fall, and medium-term net profit to remain depressed, as the higher-margin orderbook is depleted. Street estimates appear to be too bullish, in our view.

Given the weak earnings outlook, the stock has already lost ~70% of its value since peaking in late-2013 and has reached a trough in the past six months, in our view, suggesting that the bad news is already in the price.

With planned action by OPEC and non-OPEC nations to curtail oil output from 1 Jan 2017, we think sentiment could improve as higher oil prices benefit SAKP directly via its energy output, and indirectly by way of a possible improvement in drilling and subsea construction asset utilisation. Historically, SAKP‟s share price has a reasonably good correlation with the Brent crude oil price.

Figure 78: Brent crude oil price (US$/bbl) and SAKP's share price (RM)


Meanwhile, we believe SAKP‟s energy business under SapuraKencana Energy (SKE) is set for a major profit uplift. SKE is currently producing from legacy oil blocks in Peninsular Malaysia at a loss, based on spot oil prices. But when gas from the SK310 B15 block starts producing from late-FY18F, and gas from SK408 begins flowing from late-FY19F, we expect SKE to enjoy a major uplift in profits. Gas from these two blocks are sweet and relatively inexpensive to develop, while Petronas is a keen buyer and willing to sign lucrative gas sales agreements with the wellhead suppliers, in our view.

We expect SapuraKencana Drilling (SKD) to be a drag on the overall group, with losses expected from FY18F onwards. Still, in the context of an oversupplied market for drilling rigs globally, the outcome for SKD has been very good, in our opinion. SKD has a 50% market share in the global tender drilling rig business, and is dominant in the industry. Tender rigs offer a niche

Title:

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1.00

2.00

3.00

4.00

5.00

6.00

30

50

70

90

110

130

150

May-12 May-13 May-14 May-15 May-16

Brent price (US$/bbl) - LHS SAKP share price (RM) - RHS


89

drilling solution, unlike the more popular jack-up rigs. As such, there are only 30 tender rigs available for charter globally, and only eight competitors to SKD. Speculative newbuilding orders have been few and fleet growth is limited. These dynamics have kept SKD‟s EBITDA margins high at 40-50%, and although we have projected net losses for SKD in the next few years, the losses are small relative to some jack-up drilling companies, and will be manageable for the SAKP group as a whole, in our view.

SAKP‟s engineering & construction (E&C) division is also doing respectably. We believe SAKP probably won RM3.8bn in new E&C contracts in the 9M from 1 Feb to 31 Oct 2016, slightly more than the revenue recognised in the period, keeping its E&C orderbook from depleting. In our view, this is no small feat given the current environment of low pricing and reduced willingness by oil majors to spend.

Separately, the Brazil PLSV JV continues to do well, with an almost 100% technical utilisation and charters paid on time by Petrobras. The fleet of six PLSVs is almost brand new and we believe there is a high likelihood of Petrobras renewing into the option period. We also believe that there will be plenty of opportunities for redeployment in West Africa should Petrobras opt not to renew their charters in the later years.

Figure 79: Segmental breakdown of revenue and core PBT (FYE Jan) - RM m


FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY20F FY21F FY22F FY23F FY24F

CY12 CY13 CY14 CY15 CY16F CY17F CY18F CY19F CY20F CY21F CY22F CY23F

Revenue 6,912 8,379 9,943 10,184 7,701 6,762 7,108 6,713 6,668 7,280 9,247 9,650

Engineering & Construction 5,697 5,540 5,221 5,646 4,648 4,017 4,325 4,000 4,000 4,500 5,000 5,000

Drilling & Energy Svs 1,215 3,042 4,893 4,555 3,074 2,765 2,803 2,733 2,688 2,800 4,267 4,670

- Drilling 419 2,739 2,956 2,084 1,807 1,714 1,483 1,867 1,953 1,965 2,594

- Energy 796 2,154 1,600 990 957 1,089 1,251 820 847 2,302 2,076

Eliminations 0 -203 -1,096 -17 -20 -20 -20 -20 -20 -20 -20 -20

Core PBT 830 1,208 1,671 1,430 938 284 280 699 337 425 1,198 1,677

Engineering & Construction 828 637 924 1,087 622 545 626 528 518 628 734 753

Drilling & Energy Svs 275 969 1,262 760 287 -21 19 174 171 140 803 1,246

- Drilling 635 644 285 -5 -60 -216 -29 -32 -13 492

- Energy 627 116 1 -16 79 390 200 172 816 755

Corporate expenses and

eliminations

-273 -398 -515 -418 29 -240 -365 -3 -352 -343 -339 -322

PBT margin (%) 10.0% 11.6% 13.7% -8.9% 9.3% 0.9% 0.4% 7.2% 1.8% 2.4% 10.2% 14.8%

Core PBT margin (%) 9.2% 11.6% 12.1% 12.2% 8.8% 0.9% 0.4% 7.2% 1.8% 2.4% 10.2% 14.8%

Engineering & Construction 12.8% 8.2% 14.9% 16.7% 8.8% 7.8% 8.5% 7.7% 7.5% 8.5% 9.5% 10.0%

Drilling & Energy Svs 22.6% 30.1% 23.7% 15.7% 7.9% -0.4% 1.0% 6.4% 6.3% 5.0% 18.8% 26.7%

- Drilling 0.0% 0.0% 23.2% 21.8% 13.7% -0.3% -3.5% -14.6% -1.5% -1.7% -0.7% 19.0%

- Energy 0.0% 0.0% 24.3% 4.3% -4.4% -0.6% 8.2% 31.2% 24.3% 20.3% 35.4% 36.3%


90

The SOP valuation

We have generally valued each business separately using DCF or NTA, and added them together to form a Sum-of-Parts valuation.

Energy

The energy division is valued using the DCF methodology until the end of field production. Included in the valuation are the oil blocks in Peninsular Malaysia, the SK310 B15 gas block for which a gas sale agreement has already been signed with Petronas, as well as the SK408 gas production. The gas sale agreement for SK408 has not yet been signed, and neither has the field development plan been approved. We believe that there is a high probability for the SK408 gas to be developed and then sold to Petronas, in view of 1) the sweet nature of the gas, and 2) Petronas‟s eagerness to secure new sources of raw gas feed into the Bintulu LNG liquefaction plants to offset production declines at more mature gas fields offshore Sarawak. Please see Figures 21 and 23 for the assumptions and P&L of the energy business.

Drilling

We have valued the drilling division using the DCF methodology as well and applied it to the cashflows of the 16 tender drilling rigs until the end of their 30-year useful lives, based on certain utilisation and day rate assumptions (Figures 36-37). The drilling P&L is set out in Figure 42.

Engineering and construction

The E&C division has been valued at the net tangible asset (NTA) value of its fixed assets, almost all of which is comprised of the value of various marine vessels like the derrick lay vessels, diving support vessels, ROVs, a construction vessel and launch barge, and a handful of OSVs. There is only very minimal value attached to its fabrication yard in Lumut.

Ideally, we would have liked to calculate a DCF valuation for the E&C business, but it would be too technically difficult since the E&C division is now characterised by the preponderance of short-term contracts. The current E&C orderbook is set to last a little more than one year. We have used the NTA value of the E&C fixed assets as a proxy to DCF. SAKP last tested for impairment of the valuation of its E&C fixed assets in January 2016, in conjunction with the release of its full-year results.

The assumptions and P&L forecast for the E&C division is set out in Figures 56-57.

PLSV

We valued SNM‟s PLSV business in Brazil also using DCF until the end of each vessels‟ useful life at 30 years, based on certain utilisation and day rate assumptions (Figures 61-62). We have attributed 50% of the value of SNM to our SAKP SOP, corresponding to SAKP‟s equity stake in the JV.


91

Discount rate used for Energy and Drilling businesses

We have used a real WACC of 6.87% to discount cashflows from the energy and drilling businesses. This is based on a long-term equity weighting of 40% and debt weighting of 60%.

The nominal cost of equity of 16% is based on a risk-free rate of 2%, equity risk premium of 6% and a beta of 2. Against that, we have deducted an assumed inflation rate of 3% to derive our real cost of equity of 12.6%.

We have applied a post-tax interest rate of 3%, based on a pre-tax interest rate of 4% and Malaysia‟s corporate tax rate of 24%.

We are using a real WACC rate because we have not explicitly factored in inflation in our long-term revenue and cost estimates.

Discount rate used for PLSV business

For the PLSV business, we have forecasted geared cashflows by deducting estimated principal repayments and interest expense from cashflows to the firm. We have used this method, because we expect the PLSV cashflows to be very strong and all debts should be fully repaid long before the assets reach end-of-life. We have discounted these geared cashflows using the real cost of equity of 12.6%.

Figure 80: Weighted average cost of capital calculation


Net debt

From the sum total of the valuation above, we have deducted the group debts parked at SKTMC, added back cash, and deducted forecasted residual net liabilities (comprising mainly of trade and other payables, less trade and other receivables). The debts of SNM‟s PLSV business are not consolidated and hence not included here.

Pre-goodwill equity SOP of RM1.19/share

This gives us a group equity SOP of RM1.19/share, excluding the RM1.36/share of goodwill booked in SAKP‟s balance sheet.

Risk-free rate 4.0%

Equity risk premium 6.0%

Beta 2

Cost of equity (nominal) 16.0%

Inflation rate (%) 3.0%

Cost of equity (real) 12.6%

Pre-tax interest rate 4.0%

Effective tax rate 24.0%

Cost of debt (post tax) 3.0%

Weighting

- Equity 40%

- Debt 60%

WACC (nominal) 8.22%

WACC (real) 6.87%


92

Discussion on goodwill

The next step is for us to decide what to do with the RM8bn of goodwill booked on the balance sheet.

RM4bn of that goodwill arose from the combination of SapuraCrest and Kencana Petroleum back in 2012. SAKP purchased the assets of both companies via the issuance of new shares and cash, resulting in the goodwill.

Another RM4bn of goodwill arose from the acquisition of Seadrill‟s tender drilling rig business in 2013.

No goodwill arose from the acquisition of Newfield in 2014, as the value of Newfield‟s assets were revised upwards post the acquisition, resulting in a negative goodwill that was credited to the P&L that year.

The goodwill that was booked as the estimated future cashflows and earnings from the acquired assets in a US$100/bbl oil price environment was adjudged to be greater than the historical cost of the assets on the balance sheet of the acquired companies at the time of the acquisitions.

To the extent that the oil price has since corrected sharply, the future cashflows and earnings from the acquired assets will not likely be as high as previously assumed at the time of the acquisitions, in our view. In so far as this is true, we believe that the goodwill on SAKP balance sheet ought to be written down.

The greater difficulty is to estimate by how much the goodwill ought to be written down. We are applying a simple 50% discount because not all of the goodwill can be attributed to the estimated future cashflows of the existing assets; we believe a portion is likely to come from the enhanced capabilities of the combined companies as a merged business entity.

For instance, the combination of SapuraCrest and Kencana gave rise to a new entity that is able to tap into the original companies‟ combined capabilities to bid for large, integrated projects, which neither entity was able to participate in on a standalone basis in the past. This includes EPCIC work, for which SAKP has successfully bid for both local and overseas contracts. We believe these intangible capabilities and benefits continue to be relevant for SAKP today.

On the drilling side, the acquisition of Seadrill‟s tender rig business gave SKD heft and control over 50% of the global tender drilling assets, as it grew its fleet from five strong to 16 strong overnight. It also opened the door for SKD to penetrate into the West Africa and Latin America markets, regions where Seadrill had deployed some of its own tender rigs prior to the sale to SAKP. These customer relationships are very valuable to SKD because West African and Latin American day rates are materially higher than day rates in Southeast Asia. In our view, these intangible benefits continue to be relevant to SKD today.

The net result after adding in half of the goodwill on the balance sheet into our SOP calculation is a valuation of RM1.87/share, which forms the basis for our target price.

Downside risks to our Add call include the possibility of lower oil prices if planned production cuts are not adhered to, and the risk of an extended period of capex spending reticence by the oil majors even if oil prices recover.


93

Figure 81: Sum of Parts - End-CY17F


Total Total Per share

US$ m RM m RM

Energy DCF value to firm 1,234.2 5,307.2 0.89

* PM oil blocks 71.0 305.3

* SK310 B15 gas block 135.1 581.1

* SK408 gas blocks 1,028.1 4,420.8

Drilling DCF value to firm 2,456.5 10,563.1 1.76

Engineering & construction fixed assets NTA 1,022.7 4,397.6 0.73

Firm valuation of subsidiaries' NTA + cashflows 4,713.5 20,267.9 3.38

Less: Group debt at SapuraKencana TMC - end of CY -3,919.7 -16,854.6 -2.81

Add: Cash - end of CY 645.1 2,773.9 0.46

Add: Residual net assets end of CY -57.5 -247.0 -0.04

Equity valuation of subsidiaries' NTA + cashflows 1,381.4 5,940.0 0.99

Add: Share of Sapura Navegação's DCF to equity (RM m) 277.5 1,193.2 0.20

Group equity valuation of NTA + cashflows 1,658.9 7,133.2 1.19

Add: Goodwill on 1,901.6 8,176.8 1.36

* Combination of SapuraCrest and Kencana Petroleum 960.1 4,128.4

* Acquisition of Seadrill Tender Rig Ltd 941.5 4,048.4

Less: Discount on goodwill -950.8 -4,088.4 -0.68

Total equity valuation (including goodwill) 2,609.7 11,221.6 1.87

No of shares (m) 5,992.2

Exchange rate (RM:US$1) 4.30

Discount on goodwill 50%

Apply a 50% discount on the goodwill.

End-CY17F

Notes

As at 31 January 2016

This is the equity valuation of SAKP group without goodwill.


94

Sector comparison table

Figure 82: Sector Comparisons

SOURCES: CIMB, BLOOMBERG; NOTE: 3-YEAR EPS CAGR REPRESENTS THE GROWTH IN EPS FROM CY15 to CY18F

Price Target Price

(local curr) (local curr) CY16F CY17F CY16F CY17F CY16F CY17F CY16F CY17F CY16F CY17F

SapuraKencana Petroleum SAKP MK Add RM1.61 RM1.87 2,154 21.3 99.4 -51.4% 0.7 0.7 3.9% 0.7% 9.0 10.9 0.6% 0.6%

UMW Oil & Gas UMWOG MK Hold RM0.79 RM0.90 381 na na na 0.6 0.6 -13.6% -10.5% na 63.4 0.0% 0.0%

Perisai Petroleum PPT MK Reduce RM0.05 RM0.02 14 17.4 na -358.1% 0.2 0.2 0.7% -14.6% 17.1 36.4 0.0% 0.0%

PetroVietnam Drilling PVD VN Add VND21,500 VND29,500 362 16.3 6.3 -10.7% 0.5 0.5 3.4% 8.4% 6.6 1.4 0.0% 0.0%

Mermaid Maritime MMT SP Add S$0.15 S$0.17 143 7.1 10.7 70.2% 0.4 0.4 6.1% 3.9% 1.8 1.7 0.0% 0.0%

Aban Offshore ABAN IN Not Rated Rs236.60 - 210 na 7.0 na 0.2 0.2 -1.1% 3.4% 8.4 7.3 1.1% 1.5%

Japan Drilling 1606 JP Not Rated ¥2,515 - 645 na na -52.7% 0.9 1.0 -24.6% -6.4% na 1780.3 1.2% 0.5%

China Oilfield Services 2883 HK Not Rated HK$7.51 - 7,359 na na -24.0% 0.9 0.9 -18.1% -0.2% na 12.2 0.3% 0.3%

Transocean RIG US Not Rated US$15.13 - 9,186 17.6 na -158.0% 0.4 0.4 2.1% -1.1% 6.8 9.0 0.0% 0.0%

Ensco ESV US Not Rated US$10.44 - 6,448 6.7 66.4 -145.0% 0.4 0.4 5.6% 0.6% 5.7 8.6 0.4% 0.4%

Rowan Companies RDC US Not Rated US$19.97 - 3,951 10.0 na -179.2% 0.5 0.5 5.0% -1.6% 4.8 8.3 0.0% 0.0%

Diamond Offshore DO US Not Rated US$19.22 - 4,045 18.7 24.0 -115.7% 0.7 0.7 3.6% 2.9% 7.1 6.9 0.0% 0.0%

Noble Corp NE US Not Rated US$6.63 - 2,745 na na -182.0% 0.2 0.2 -0.4% -4.7% 5.9 9.8 2.7% 0.0%

Seadrill SDRL US Not Rated US$3.71 - 2,451 2.9 24.1 -168.7% 0.2 0.2 6.7% 0.8% 5.6 9.5 0.0% 0.0%

Saipem SPM IM Not Rated €0.51 - 7,002 13.1 23.4 na 0.9 0.9 5.3% 3.8% 5.2 6.2 0.2% 0.6%

Drilling rigs group 38.8 na -158.5% 0.4 0.5 1.1% -0.2% 7.2 8.7 0.3% 0.2%

Aker Solutions AKSO NO Not Rated Nok40.55 - 1,246 27.8 76.2 -37.9% 1.7 1.7 6.2% 2.3% 7.1 9.3 0.1% 0.2%

FMC Technologies FTI US Not Rated US$34.63 - 7,733 32.5 33.3 -15.1% 2.9 2.7 9.3% 8.5% 14.0 13.6 0.0% 0.0%

Technip TEC FP Not Rated €66.13 - 8,062 12.6 17.1 -12.4% 1.6 1.5 12.1% 8.8% 5.1 5.7 3.4% 3.4%

McDermott International MDR US Not Rated US$11.33 - 1,660 31.1 52.9 -4.3% 1.8 1.7 5.8% 3.3% 8.9 9.9 0.0% 0.0%

Saipem SPM IM Not Rated €0.51 - 7,002 13.1 23.4 na 0.9 0.9 5.3% 3.8% 5.2 6.2 0.2% 0.6%

Subsea 7 SUBC NO Not Rated Nok110.40 - 3,892 8.6 30.5 -44.1% 0.7 0.7 8.7% 2.4% 3.6 5.9 0.0% 0.3%

Subsea group 15.6 25.8 0.5% 1.3 1.3 8.5% 5.1% 6.2 7.5 1.0% 1.1%

Oceaneering International OII US Not Rated US$41.54 - 2,613 56.5 8648.2 -46.2% 2.5 2.6 4.5% 0.0% 11.6 15.7 2.3% 1.4%

Pacific Radiance PACRA SP Reduce RM0.14 RM0.13 71 na na -215.0% 0.2 0.2 -12.6% -8.6% na 141.7 0.0% 0.0%

Marine services 160.5 na -46.7% 2.2 2.2 1.3% -1.4% 13.7 17.6 2.3% 1.4%

Malaysia Marine & Heavy Eng MMHE MK Reduce RM0.88 RM0.72 313 13.0 11.8 -8.8% 0.6 0.6 4.2% 4.9% 3.2 2.4 9.1% 9.1%

Keppel Corporation KEP SP Reduce RM5.97 RM5.14 7,484 11.5 11.0 -14.2% 0.9 0.9 8.4% 8.2% 10.9 11.6 3.5% 3.6%

Sembcorp Marine SMM SP Hold RM1.43 RM1.40 2,056 24.4 32.1 -30.4% 1.1 1.1 4.8% 3.5% 13.5 14.9 1.4% 1.1%

Fabricator group 12.9 12.8 -16.7% 0.9 0.9 7.5% 7.3% 11.2 11.9 3.0% 3.0%

KrisEnergy Ltd KRIS SP Not Rated S$0.51 - 353 na na na 1.21 1.26 -11.2% -1.7% 14.6 6.7 0.0% 0.0%

SOCO International SIA LN Not Rated £162.42 - 592 na 4328.4 na 96.8 82.2 -1.4% 2.1% 786.7 485.0 0.0% 0.0%

Upstream na 7614.8 na 61.6 56.1 -5.0% 0.8% 482.0 257.5 0.0% 0.0%

Average (all) 42.2 80.6 -45.2% 1.4 1.4 3.3% 1.8% 12.0 14.4 0.6% 0.5%

P/BV (x) Recurring ROE (%) EV/EBITDA (x) Dividend Yield (%)Company Bloomberg Ticker Recom.

Market Cap

(US$ m)

Core P/E (x) 3-year

EPS CAGR


95

APPENDIX 1: ADDITIONAL BACKGROUND DETAILS

Major shareholders

Immediately after the merger of SapuraCrest and Kencana Petroleum, which was completed on 15 May 2012, Tan Sri Dato‟ Seri Shahril Shamsuddin and his brother, Dato‟ Shahriman Shamsuddin (earlier major shareholders of SapuraCrest) held a 20.18% stake in SAKP, with Dato‟ Mokhzani Mahathir (major shareholder of Kencana Petroleum) holding the second-largest block at 16.12%. Seadrill, which held more than a 20% interest in SapuraCrest prior to the merger, secured an 11.78% interest in the merged entity.

Seadrill sold some of its shares in May 2012 and reduced its stake to 6.39%, but in April 2013, it was issued new shares as part payment for the sale of its tender drilling rig business to SAKP. The latter event raised its stake to 12.02%. The rest of its stake was sold off in two transactions in April 2014 and April 2016. Seadrill no longer has any direct shareholdings in SAKP, but remains a partner with SAKP in its Brazilian JV, Sapura Navegação Maritima SA.

The combined stake of Tan Sri Dato‟ Seri Shahril Shamsuddin and his brother, Dato‟ Shahriman Shamsuddin, in SAKP was diluted from 20.18% post-merger, to 16.85% on 28 May 2013. This was because on 26 April 2013, SAKP executed a private placement of 587m new shares at RM2.80/share (raising gross proceeds of RM1,643.6m), as well as issued 400.79m new shares to Seadrill at RM2.70/share, as part consideration for the acquisition of the latter's tender drilling rig business.

Dato‟ Mokhzani Mahathir‟s stake in SAKP was diluted from 16.12% post-merger to 13.43% on 28 May 2013 for the same reasons.

On 18 February 2014, Khasera Baru Sdn Bhd, which is Dato‟ Mokhzani Mahathir‟s private investment vehicle, disposed 190.32m SAKP shares (3.2% stake) at RM4.30/share (for gross proceeds of RM818.4m), leaving a remaining interest in 605m shares representing 10.1% interest in SAKP. The buyers were seven institutions made up largely of government-linked investment companies. After the transaction, Dato‟ Mokhzani Mahathir's direct and indirect interest in SAKP declined to 614.5m shares, or a 10.26% interest in SAKP.

The largest institutional investors in SAKP are EPF at 15.1% and PNB with at least an 11.76% interest (Figure 83).

Figure 83: Shareholding structure


15-May-12 28-May-13 30-Apr-14 30-Apr-15 29-Apr-16

Shares held (m)

Tan Sri Dato' Seri Shahril Shamsuddin and brother 1,009.85 1,009.41 1,009.41 1,015.93 1,025.53

Dato' Mokhzani Mahathir (including indirect stake via Khasera Baru Sdn Bhd) 806.88 804.81 614.49 614.49 619.49

Seadrill Limited 589.40 720.33 490.33 490.33 0.00

EPF 460.20 684.26 772.16 877.78 904.58

PNB 329.00 615.21 690.90 703.70

Percentage held (%)

Shamsuddin brothers 20.18% 16.85% 16.85% 16.95% 17.11%

Dato' Mokhzani Mahathir 16.12% 13.43% 10.26% 10.26% 10.34%

Seadrill Limited 11.78% 12.02% 8.18% 8.18% 0.00%

EPF 9.20% 11.42% 12.89% 14.65% 15.10%

PNB 5.40% 10.25% 11.53% 11.76%


96

Key capital market events

Figure 84: Key capital market events for SapuraKencana Petroleum Berhad (SAKP)



11-Jul-11 On 11 July 2011, SAKP made an offer to merge SapuraCrest Petroleum Bhd and Kencana Petroleum Bhd .

SapuraCrest was valued at RM5,872.9m, and its shareholders will be issued 2,498.9m SAKP shares at RM2/share as well as cash consideration of

RM875.1m. Shareholders holding 1,000 SapuraCrest shares will receive 1,957 SAKP shares worth RM3,914 and cash consideration of RM686, for a total

consideration of RM4,600.

Kencana Petroleum was valued at RM5,979.6m, and its shareholders will be issued 2,505.4m SAKP shares at RM2/share as well as cash consideration of

RM968.7m. Shareholders holding 1,000 Kencana Petroleum shares will receive 1,257 SAKP shares worth RM2,514 and cash consideration of RM486, for a

total consideration of RM3,000.

5-Aug-11 On 5 August 2011, both SapuraCrest and Kencana Petroleum accepted SAKP's offer.

17-May-12 On 15 May 2012, the merger of SapuraCrest and Kencana Petroleum was completed. On 17 May 2012, the combined and enlarged base of

5,004,366,198 shares of SapuraKencana Petroleum Berhad were listed on Bursa Malaysia. The shareholding structure at the time of listing was as follows:

- The Shamsuddin brothers (including Dato' Seri Shahril Shamsuddin and Shahriman Shamsuddin): 20.18% (1,009.85m shares)

- Dato' Mokhzani Mahathir (including indirect stake via Khasera Baru Sdn Bhd): 16.12% (806.88m shares)

- Seadrill Limited 11.78% (589.4m shares)

- EPF: 9.20% (460.2m shares)

24-May-12 On 24 May 2012, Seadrill Limited purchased 30.135m shares in SAKP, raising its stake from 589.4m shares (representing 11.78% stake) to 619.54m

shares (representing 12.39% stake).

30-May-12 On 30 May 2012, Seadrill Limited disposed 300m shares in SAKP (6% stake) at RM2.12/share, reducing its interest in SAKP from 12.39% down to 6.39%

(representing 319.54m SAKP shares).

8-Feb-13 On 8 February 2013, SAKP proposed a base placement of new SAKP shares to investors to be identified to raise gross proceeds of US$250m to part finance

the proposed Seadrill acquisition. SAKP also proposed an additional placement of up to 300m new SAKP shares which may be implemented in tranches to

investors to be identified after the completion of the proposed Seadrill acquisition.

3-Apr-13 On 3 April 2013, SAKP announced that it will execute a private placement of 587m new shares at RM2.80/share , raising proceeds of RM1,643.6m. Of the

proceeds, RM1,524.2m will be used as cash consideration for the Seadrill acquisition, while the remaining RM119.4m will be used to defray expenses relating

to the placement. This supercedes the announcement and proposal dated 8 February 2013.

18-Apr-13 On 18 April 2013, SapuraKencana Drilling Pte Ltd, a wholly-owned subsidiary incorporated in Labuan, entered into a facility agreement with Standard Chartered

Bank as the coordinating bank, Maybank Investment Bank Berhad as the agent and security agent and ABN AMRO Bank N.V., Singapore Branch,

AmInvestment Bank Berhad, BNP Paribas, CIMB Bank Berhad, The Hongkong and Shanghai Banking Corporation Limited, Maybank IB and Malayan Banking

Berhad, RHB Bank Berhad, Standard Chartered Bank and United Overseas Bank (Malaysia) Bhd as the lenders for the US$1,850m short term facility in relation

to proposed Seadrill acquisition.

26-Apr-13 On 26 April 2013, the private placement of 587m new SAKP shares at RM2.80/share (raising gross proceeds of RM1,643.6m) as well as the issue of

400.79m shares to Seadrill Limited at RM2.70/share as part consideration for the acquisition of the latter's tender drilling rig business, was listed on Bursa

Malaysia. The issue of shares to Seadrill Limited raised its stake in SAKP from 319.54m shares (6.39% stake) to 720.33m shares (12.02% stake).

19-Feb-14 On 19 February 2014, SAKP announced that Khasera Baru Sdn Bhd had disposed 190.32m SAKP shares (3.2% stake) at RM4.30/share on 18 February

2014 (for gross proceeds of RM818.4m), leaving a remaining interest in 605m shares representing 10.1% interest in SAKP. The buyers were seven institutions

made up largely of government-linked investment companies. After the transaction, Dato‟ Mokhzani Bin Mahathir's direct and indirect interest in SAKP declined

to 614.5m shares, or 10.26% interest in SAKP. Dato‟ Mokhzani is the sole owner of Khasera Baru Sdn Bhd.

20-Mar-14 On 20 March 2014, SAKP has successfully concluded and signed a RM16.5bn (US$5bn) refinancing club deal with 13 local, regional and international

banks. The club deal constitutes a senior multicurrency term and revolving facilities with short and long-term tenures of up to 7 years. About 70% of the

borrowings are in US$ which provides as a natural hedge against the kind of businesses that SKPB engages in.

The refinancing program was put in place to replace and streamline facilities that were inherited following the merger of SapuraCrest Petroleum and Kencana

Petroleum in 2012. It was also undertaken for the financing of the Group's two most recent acquisitions the Seadrill tender-rig business and the purchase of

the entire equity interest in Newfield Malaysia Holding Inc.

Approximately 80% or RM13bn of the refinancing package is dedicated for assets that are fully contracted out to International Oil Companies and National Oil

Companies.

This was made possible through the Treasury Management Company (TMC) status that has been granted to SapuraKencana by Bank Negara which provides

for incentives which includes exemption from withholding tax on interest payments/profits on borrowings, exemption from stamp duty on all financing

agreements as well as flexibilities in Foreign Exchange Administration (FEA).

15-Apr-14 On 15 April 2014, Seadrill Limited disposed 230m shares in SAKP (3.84% stake) at RM4.30/share, reducing its interest in SAKP from 12.02% down to

8.18% (representing 490.3m SAKP shares).

15-Jan-15 On 15 January 2015, SAKP's wholly-owned subsidiary, SapuraKencana TMC Sdn Bhd (SKTMC), today signed a US$2.3bn equivalent Islamic Facility

Agreement, to convert a portion of its existing conventional Multi-Currency Facility (MCF) borrowings into a facility based on the Shariah principle of

Murabahah with 11 local, regional and international banks. SAKP is now on track to return to the Securities Commission's List of Shariah Compliant

Securities by meeting the debt over total assets financial ratio benchmark.

15-Jun-15 On 15 June 2015, SapuraKencana TMC Sdn Bhd (SKTMC) announced the lodgement and launch of a Multi-Currency Islamic Medium Term Notes Programme

(Multi-Currency Sukuk Programme). The programme has a tenure of 30 years and a nominal value of RM7bn or its equivalent in US$. The proceeds that will

be raised from the issuance(s) under the Multi-Currency Sukuk Programme will be utilised to refinance SKTMC‟s existing financings and to fund oil and gas

related business requirements for the SKPB Group of companies. The Multi-Currency Sukuk Programme is not rated and structured based on the Shariah

principle of Murabahah (via Tawarruq arrangement).

8-Sep-15 On 8 September 2015, SapuraKencana TMC Sdn Bhd (SKTMC) issued the first tranche of the Sukuk offering of US$200m in nominal value under the Multi–

Currency Sukuk Programme.

16-Dec-15 On 16 December 2015, SapuraKencana TMC Sdn Bhd (SKTMC), signed a US$2.1bn equivalent Murabahah term financing facility (Islamic Facility) with a

consortium of Malaysian, regional and international banks. The 6-year multi-currency Islamic Facility is based on the Shariah principle of Murabahah and

proceeds raised shall be utilised to refinance SKTMC‟s existing short -term Islamic facility due in 2016.

29-Jan-16 On 29 January 2016, SapuraKencana TMC Sdn Bhd made a further issuance of RM176m in nominal value of unrated Sukuk Murabahah under the Multi-

Currency Sukuk Programme. Proceeds raised from this issuance will be utilised to part refinance SKTMC‟s existing financings .

29-Apr-16 On 29 April 2016, Seadrill Limited disposed all of its remaining 490.3m shares in SAKP (8.18% stake) at a price of RM1.58/share. It no longer held any

shares in SAKP from 29 April 2016 onwards.


97

Board of directors and management team

Board of directors

SAKP‟s chairman is Dato‟ Hamzah Bakar, aged 72, who is also a non-independent, non-executive director. Dato‟ Hamzah had earlier built a 20-year long career in Petronas, during which he served in various senior management and board positions. After Petronas, Dato‟ Hamzah served as a board member in SapuraCrest Petroleum as a nominee of Sapura Technology. He was appointed to the board of SAKP in December 2011, and assumed his current position as chairman in February 2013.

Tan Sri Dato‟ Seri Shahril Shamsuddin, aged 55, has been the President and Group CEO of SAKP since December 2011. He had built the business at SapuraCrest up to the point of the merger with Kencana Petroleum, and then emerged as the single-largest shareholder post-merger.

Mr. Ramlan Abdul Malek, aged 61, has management oversight for Engineering & Construction – Malaysia, Corporate Supply Chain Management, Corporate, Legal and Internal Audit. He has 35 years of working experience in the upstream E&P areas, and previously held various senior positions in Petronas in charge of the E&P operations.

Dato‟ Shahriman Shamsuddin, the brother of Tan Sri Dato‟ Seri Shahril Shamsuddin, is a non-independent, non-executive director.

Independent, non-executive directors include Tan Sri Datuk Amar (Dr) Hamid Bugo, aged 70, Mr. Mohamed Rashidi Mohamed Ghazalli, aged 59, Ms. Gee Siew Yoong, aged 66, and Datuk Muhamad Noor Hamid, aged 64. Their profiles can be found in the SapuraKencana Annual Report 2016.

Management team

Aside from Tan Sri Dato‟ Seri Shahril Shamsuddin and Mr. Ramlan Abdul Malek, here are other senior members of the management team:

Ms. Chow Mei Mei, aged 48, is the Senior Vice President (SVP) in charge of Financial Advisory & Portfolio Planning with effect from 1 June 2016. Prior to joining SAKP, she worked at the Sapura group and was responsible for treasury and corporate finance matters, with these responsibilities extending into SapuraCrest. Before joining Sapura group, she held several senior positions at the Sime Darby group.

Mr. Reza Abdul Rahim, aged 39, assumed the role of Group Chief Financial Officer on 1 June 2016. He is trained in accounting and finance and had worked with the Sapura group and at Axiata prior to joining SAKP.

Mr. Ahmad Zakiruddin Mohamed, aged 44, is the SVP for Engineering & Construction – Malaysia. Prior to joining SAKP in 2012, He had widespread experience in many areas of construction work in the non-O&G sectors.

Mr. Vivek Arora, SVP, aged 47, is in charge of Engineering & Construction – International. Before joining SAKP, he had project engineer experience in HUC services in India and worked with McDermott and Global Offshore International Limited in the UAE.

Datuk Kris Azman Abdullah, aged 52, is the SVP with responsibility for the Energy business. Prior to joining SAKP, he had many years of experience in the financial services industry. His current role at SAKP is to develop and manage the oil and gas fields, as well as venturing into new field development and production technologies.

Finally, Mr. Raphael Siri, 45, is the SVP of SapuraKencana Drilling in May 2013, following the acquisition of Seadrill‟s tender rig business. He has more than two decades worth of experience in drilling operations. He currently holds the title of SVP, Group Transformation, Strategy and Supply Chain as of June 2016.

http://ir.chartnexus.com/sapurakencana/docs/ar/ar2016.pdf


98

APPENDIX 2: ENERGY CONVERSION FACTORS

Conversion factors

1 barrel of oil equivalent (boe) = 5,642 standard cubic feet (scf) of gas

1 scf of gas = 1,028 British thermal units (btu)

Hence, 1 boe = 5,800,000 btu = 5.8 mmbtu

1 million tonnes of LNG = 49,257,899 mmbtu

Mmboe means million barrels of oil equivalent.

Mmbtu means million British thermal units.

Mmscf represents million standard cubic feet (of gas).


99

APPENDIX 3: PSC and RSC COMMERCIAL TERMS

Commercial terms of Production Sharing Contracts (PSCs)

The entire ownership of Malaysia‟s oil and gas assets is vested to Petronas, and Petronas has the exclusive right to exploit the nation‟s energy resources. Despite this, Petronas does not have the capacity to put up all the capex and opex necessary to open the spigot of production, and so brings in international and local partners under the PSC regime. Petronas Carigali, which is Petronas‟s wholly-owned subsidiary, is typically one of the signing PSC contractors.

PSCs stipulate the contractual period during which the PSC contractors can benefit from the production of the field, specifies the equity ownership of each of the PSC contractors, identifies which one of the PSC contractors will be earmarked as the operator of the field, and sets out the way in which costs can be recovered and profits shared with all stakeholders, including the government of Malaysia, Petronas, and the individual PSC contractors.

According to Petronas‟ PSC terms, during the exploration stage, the PSC contractors are required to put up the capex necessary to perform the seismic surveys and exploration drilling in a particular block.

If no energy resources are found in that block, the PSC contractors will have to absorb the exploration costs with no recourse back to Petronas.

If energy resources are found in specific fields, but the development of those fields is considered economically unviable, then the exploration capex spent will also have to be absorbed without recourse to Petronas.

If energy resources are found in several fields in a particular block, but only a subset of the fields is economically viable to develop, the PSC contractors are entitled to recover all their exploration capex spent on all of the fields in that particular block (including capex spent on uneconomic discoveries or on dry wells), from the production of the fields in that same block which are economically viable to develop.

During the production stage, PSC contractors take a share of the oil and gas production to compensate for their opex and capex spending, and also to earn profits. Hence, the contractors are exposed to the risk of fluctuating oil and gas prices. The value of the oil and gas produced in excess of royalties, opex recovery, capex recovery, production tax, and petroleum income tax, is booked as profits.

The current PSC regime is based on terms that were revised by Petronas back in 1996. The „revenue over cost‟ concept, or „R/C‟ concept (also called the „R-Factor‟), is the cornerstone of the calculation of how revenues will be allocated and profits shared.

The following terms are defined and explained as per Petronas‟ revised PSC agreement. The source of our information is from the Lundin Petroleum disclosure, which can be found here.

Field Gross Revenue

The first step is to value the production of the field at the selling price of oil and gas. This is the Field Gross Revenue.

Allocation of Field Gross Revenue

Field Gross Revenue is then allocated between Royalty tranche, the Cost Oil + Excess Cost Oil tranche, and the Profit Oil tranche. The Royalty tranche is fixed at 10% of Field Gross Revenue. But the allocation of the residual 90% between the Cost Oil + Excess Cost Oil tranche and the Profit Oil tranche is dependent on what the R-Factor was in that particular quarter.

https://www.lundin-petroleum.com/Documents/ot_LUPE_historical_tax_pools_e.pdf


100

The R-Factor is the Total Cumulative Revenue from the field production, divided by the Total Cumulative Capex and Opex Costs on the block since the signing of the PSC.

At the start of production, the cumulative revenue is typically much lower than the cumulative capex and opex spent up to that time. So the R-Factor would be less than 1x. In this case, then the Cost Oil + Excess Cost Oil tranche would amount to 70% of Field Gross Revenue, and the Profit Oil tranche would be 20% of Field Gross Revenue.

Once the field becomes much more mature, the R-Factor may rise up to say 2x. In that case, the Cost Oil + Excess Cost Oil tranche would amount to only 30% of Field Gross Revenue, with 60% allocated to the Profit Oil tranche.

Cost Oil + Excess Cost Oil tranche

The Cost Oil + Excess Cost Oil tranche is used by the PSC contractors to recover their Total Cumulative Capex and Opex Costs spent to date. By definition, recovered capex and opex costs are called Cost Oil. Any unrecovered Cost Oil in the current quarter can be carried over to the next quarter to be recovered.

If the Cost Oil + Excess Cost Oil tranche is in excess of the actual capex and opex costs to be recovered in any particular quarter, the excess is called the Excess Cost Oil tranche.

As the field matures, the field could become „Cost Current‟, meaning that all brought forward Cost Oil has already been recovered, and the Cost Oil + Excess Cost Oil tranche for that particular quarter is being used to recover only the opex or capex costs expended in that individual quarter.

At this stage, the amount of Field Gross Revenue allocated to the Cost Oil + Excess Cost Oil tranche could exceed the actual Cost Oil that PSC contractors are entitled to recover, with the residual being the Excess Cost Oil.

Excess Cost Oil

If there is Excess Cost Oil, that portion will be shared between the PSC contractors and Petronas based on two criteria, i.e. what is the R-Factor in that quarter, and whether the Block Cumulative Production (BCP) is more than, or less than, the Threshold Volume (THV).

BCP represents the total production of oil or gas from that particular block since first oil or gas. BCP is the cumulative sum total of the production from all the fields in the block, meaning that it is not field-specific, but rather block-specific.

THV is set at either 30 mmbbl of oil, or 750 bcf of gas.

In the mature stages of field production, the BCP would likely be more than the THV, and assuming the R/C index at 1.5x, then the PSC contractors would have 40% share of the Excess Cost Oil, with Petronas taking 60% share.

Profit Oil

The portion of Field Gross Revenue that is allocated to the Profit Oil tranche is similarly shared between the PSC contractors and Petronas, based on the R-Factor and whether the BCP is less than, or more than, the THV.


101

Figure 85: R-Factors for Malaysian PSC contracts

SOURCE: LUNDIN


102

PSC Contractors’ Revenue

The PSC Contractors‟ Revenue is not the same as the Field Gross Revenue.

The Field Gross Revenue is the total production of oil or gas from the field, multiplied by the selling price of oil or gas.

On the other hand, the PSC Contractors‟ Revenue comprises only the following elements:

The Cost Oil recovered in any particular quarter, plus

The PSC contractors‟ share of Excess Cost Oil, plus

The PSC contractors‟ share of the Profit Oil.

PSC Contractors’ Pretax Profit

The PSC Contractors‟ Pretax Profit is calculated as follows:

Start with the PSC Contractors‟ Revenue, less

The Opex expended in any particular quarter, less

Research payment at 0.5% of the PSC Contractors‟ Revenue, less

Export duty at 10% of the PSC Contractors‟ Revenue, less

Supplementary Payment.

To calculate the Supplementary Payment:

First, we take the sum total of the PSC contractors‟ share of Excess Cost Oil, and the PSC contractors‟ share of the Total Profit Tranche, based on the actual price of oil realised in that quarter (#1).

Second, we perform the same calculation assuming that the selling price of oil was at a certain base price, which we assume to be US$45/bbl of oil (#2).

Third, if #1 exceeded #2, then the Supplementary Payment is calculated at 70% of the difference.

But, if #1 is less than #2, then no Supplementary Payment is required.

PSC Contractors’ Net Profit

The PSC Contractors‟ Net Profit is:

The PSC Contractors‟ Taxable Profit, less

Petroleum Income Tax of 38%.

The PSC Contractors‟ Taxable Profit is based on:

The PSC Contractors‟ Pretax Profit, adding back

Non-deductible items like Research payment and Export duty, and then

Adding back Depreciation, but deducting Capital Allowances.


103

Figure 86: Production Sharing Contract Terms in Malaysia - based on Petronas’ 1996's revised terms

SOURCE: LUNDIN


104

Commercial terms of Risk Service Contracts (RSC)

RSCs have different commercial terms compared with the ubiquitous Production Sharing Contracts (PSC). PSCs typically allow the contractors to take a share of the oil and gas production, which can be used by the contractors to recover operating costs and capital expenditure, as well as for profits. PSC contractors book in revenue from the sale of the oil and gas. As a result, PSC contractors take the risk on oil and gas prices; should oil and gas prices decline significantly, certain higher-cost PSCs may no longer be profitable. Conversely, should oil and gas prices increase significantly, the PSC contractors‟ profits would also increase.

RSCs were structured in order to encourage oil and gas companies to explore marginal oil fields, which was necessary to arrest the decline in Malaysia‟s oil and gas production. Once production begins, all the barrels of oil would belong to Petronas and Petronas will compensate the RSC contractors for their opex and capex fully, as well as pay a fixed IRR on the capex costs on a quarterly basis. The latter is called the remuneration fee. If the field revenue for the quarter is insufficient to cover the payments, the amounts owed can be carried forward to the future quarters. The RSC contractors book revenue on the basis of the opex recovery, capex recovery, and the remuneration fee; they do not book revenue from the sale of the oil and gas, since the oil and gas belong solely to Petronas. As a result, RSC contractors do not take any risk on the oil and gas prices.

This is not to say that RSC contractors do not take any risks at all. During the exploration stage, the RSC contractors are solely responsible for the costs of exploration. If the exploration is unsuccessful, the RSC contractors will bear the entire cost expended, without recourse to Petronas.

As an incentive to oil and gas companies to enter into RSCs, the petroleum income tax on RSC profits is charged at a reduced rate of 25%, against 38% tax on PSC profits.

As a result of the lower risk profile of RSCs compared to PSCs, the IRRs on RSCs are generally lower than for PSCs; we believe that mid-teens IRR for RSCs would be typical.


105

APPENDIX 4: GAS SALES AGREEMENTS

How gas exports are priced

Malaysia‟s Liquefied Natural Gas (LNG) exports have traditionally headed to Japan. As a result, the pricing of Malaysia‟s LNG exports bears a strong relationship with the Japanese Crude Cocktail (JCC), against which the long-term contracts for the sale of LNG are pegged.

According to Bank Negara‟s Quarterly Bulletin for 1Q15, Malaysia‟s LNG export price is typically 2-4 months lagged to the JCC, which is at a 1-month lag to the spot price of Brent crude.

Figure 87: Malaysian LNG exports are priced using the JCC as a benchmark

SOURCE: BANK NEGARA MALAYSIA

The LNG export price is expressed in terms of US$ per mmbtu, and is equal to a certain percentage of the JCC crude price, plus a certain constant.

More specifically, we think the LNG export price (US$/mmbtu) may be equal to a range of between 12% and 15% multiplied by the JCC crude price (US$/bbl), and adding in a constant of between US$1/mmbtu and US$2/mmbtu.

For instance, LNG export price ≈ (13% * JCC price) + US$1.50/mmbtu. This is not necessarily the contract pricing which Petronas had signed with any of its Japanese buyers; we are using this as an illustration only.

The wellhead price

The LNG export price is received by Petronas, but the wellhead price is the price that Petronas pays to the PSC contractors for supplying gas to the Bintulu LNG liquefaction plants.

The wellhead price is expressed as a percentage of the LNG export price, typically ranging between 36% and 50% of the LNG export price. The wellhead price is the price that will be received by SapuraKencana Energy, as one of the PSC partners in the SK310 and SK408 gas blocks, on its share of production from those blocks.

In a low gas price environment, the percentage of the wellhead price against the LNG export price may be higher than in a high gas price environment, as the PSC contractors need to be compensated with a reasonable IRR.


106

APPENDIX 5: OPEC PRODUCTION CUTS

Commercial terms of PSCs

OPEC and non-OPEC nations recently announced planned production cuts, effective 1 January 2017, and valid for six months until 30 June 2017.

(A) Production cuts

OPEC plans to cut production by 1.2 mmbpd, amounting to 3.5% of the 33.83 mmbpd that it produced in October.

Non-OPEC nations have committed to cut production by 0.558 mmbpd, amounting to 1% of their 57 mmbpd production in 3Q16.

The total production cut will amount to 1.758 mmbpd, amounting to 1.8% of global production of 97.16 mmbpd during 3Q16.

Hence, the production cuts are substantial, in our view.

Saudi Arabia has hinted that it may cut more than what it pledged at the meeting, so we believe the impact on the oil markets could be even greater.

Figure 88: OPEC crude oil production

SOURCES: IEA


107

Figure 89: Non-OPEC oil production

SOURCES: IEA

(B) Impact on demand-supply balance

Currently, global oil production is exceeding demand.

Global oil demand was 96.91 mmbpd in 3Q16, against global oil supply of 97.16 mmbpd. Hence, supply outstripped demand by 0.25 mmbpd.

Figure 90: Global oil demand (mmbpd)

SOURCES: IEA

From 1Q17F, we believe this is how the global demand-supply balance may look like.

Global oil demand: 96.91 mmbpd (assuming no change from 3Q16)

Global oil supply: 95.40 mmbpd (3Q16‟s 97.16 mmbpd, minus production cuts of 1.758 mmbpd)

Hence, we think demand may exceed supply by 1.51 mmbpd, assuming full compliance to the production cuts, and no increases by countries which are not part of the deal, such as the US, Canada, Norway, China and Brazil.

This will cause stocks to draw down, in our view.


108

First, let us calculate how much stocks have accumulated since 2014. According to the International Energy Agency,

In 2014, global oil stocks grew by 0.6 mmbpd, or a total of 219 mmbbl (0.6 mmbpd * 365 days)

In 2015, global oil stocks grew by 1.5 mmbpd, representing a total of 548 mmbbl (1.5 mmbpd * 365 days)

In 1Q16, global oil stocks grew by 1.1 mmbpd, i.e. a total of 100 mmbbl (1.1 mmbpd * 91 days)

In 2Q16, global oil stocks grew by 0.2 mmbpd, or a total of 18 mmbbl (0.2 mmbpd * 91 days)

In 3Q16, global oil stocks grew by 0.2 mmbpd, totalling 18 mmbbl (0.2 mmbpd * 92 days)

In total, since 2014, global oil stocks have risen by an average of 0.9 mmbpd, or 903 mmbbl.

As calculated above, if the demand for oil exceeds supply by 1.51 mmbpd, assuming full compliance, then it will take almost 600 days for the accumulation of oil stocks since 2014 to be fully used up.

Important to note that the OPEC + Non-OPEC production cuts are valid for six months until 30 June 2017 only, and if they are not extended, then the final inventory drawdown will not be so large as to reverse all the inventory accumulated since 2014, in our view.

Conversely, a portion of the build-up in stocks since 2014 has gone into China‟s accumulation of Strategic Petroleum Reserves, and will not find its way back into the commercial market.

Assuming full compliance until 30 June 2017, then the shortfall of 1.51 mmbpd will cause inventories to drawdown by 273 mmbbl (1.51 mmbpd * 181 days), or 30% of the 903 mmbbl in inventories accumulated since 2014, which is still fairly substantial, in our opinion.

(C) Shale oil production

We believe higher oil prices triggered by the OPEC + Non-OPEC production cuts have the potential to encourage more US oil production.

Based on IEA forecasts in its 10 November report, it expected US crude oil production to bounce back from a low of 12.37 mmbpd in 3Q16 to 14.47 mmbpd by 2Q17.

We think there is a possibility that IEA may revise upwards its forecast of US crude oil production in its December/January reports, given what has taken place post its 10 November report.

Figure 91: US oil production (mmbpd)

SOURCES: IEA

We think the expected increase in shale oil production may put a cap on how much oil prices can increase by.


109

According to Bloomberg, US shale oil explorers are “rushing back to the shale patch with the largest weekly addition of oil rigs since July 2015. Rigs targeting crude in the US rose by 21 to 498, the most since January, according to Baker Hughes Inc.”

Figure 92: US rig count vs. WTI crude futures

SOURCES: BLOOMBERG

(D) Oil price expectations

Our oil price assumptions are set out below. If oil prices rise further, we believe it may open up the potential for SAKP to writeback some of the impairments on oil and gas assets that it had booked in FY16.

SAKP is the most immediate beneficiary of the higher oil price, in our view, as it has equity stakes in four oil blocks in Peninsular Malaysia which are currently producing, as well as several up-and-coming gas blocks – of which SK310 B15 will start producing by 4QCY17F.

However, we think the substantial past accumulation of oil inventories, plus the potential response of US shale producers to a possibly higher oil price environment, could put a cap on the extent to which oil prices can rise.

Figure 93: Key assumptions - Energy segment




Brent price (US$/bbl) 43.49 51.98 60.73 66.32 71.57 76.81 82.06 85.94

https://www.bloomberg.com/news/articles/2016-12-12/goldman-says-saudis-wrong-to-rule-out-u-s-shale-oil-renaissance


110

BY THE NUMBERS

SOURCE: CIMB RESEARCH, COMPANY DATA

0.0%

2.3%

4.7%

7.0%

9.3%

11.7%

14.0%

0.40

0.90

1.40

1.90

2.40

2.90

3.40

Jan-13A Jan-14A Jan-15A Jan-16A Jan-17F Jan-18F

P/BV vs ROE

Rolling P/BV (x) (lhs) ROE (rhs)

-110%

-68%

-27%

15%

57%

98%

140%

0

20

40

60

80

100

120

Jan-13A Jan-14A Jan-15A Jan-16A Jan-17F Jan-18F

12-mth Fwd FD Core P/E vs FD Core EPS Growth

12-mth Fwd Rolling FD Core P/E (x) (lhs)

FD Core EPS Growth (rhs)

Profit & Loss

(RMm) Jan-15A Jan-16A Jan-17F Jan-18F Jan-19F

Total Net Revenues 9,943 10,184 7,701 6,762 7,108

Gross Profit 3,056 3,052 2,238 1,957 2,025

Operating EBITDA 3,056 3,052 2,238 1,957 2,025

Depreciation And Amortisation (1,290) (1,409) (1,241) (1,314) (1,279)

Operating EBIT 1,766 1,643 997 644 746

Financial Income/(Expense) (651) (742) (729) (719) (726)

Pretax Income/(Loss) from Assoc. 252 190 258 222 250

Non-Operating Income/(Expense) 32 338 10 10 10

Profit Before Tax (pre-EI) 1,399 1,430 536 157 280

Exceptional Items 217 (2,143) 439 127 0

Pre-tax Profit 1,616 (713) 975 284 280

Taxation (183) (79) (161) (97) (132)

Exceptional Income - post-tax

Profit After Tax 1,433 (791) 814 188 148

Minority Interests (1) (0) 0 0 0

Preferred Dividends

FX Gain/(Loss) - post tax

Other Adjustments - post-tax

Net Profit 1,433 (792) 814 188 148

Recurring Net Profit 1,114 1,199 385 70 158

Fully Diluted Recurring Net Profit 1,114 1,199 385 70 158

Cash Flow


EBITDA 3,056 3,052 2,238 1,957 2,025

Cash Flow from Invt. & Assoc.

Change In Working Capital (846) (698) 206 (788) (36)

(Incr)/Decr in Total Provisions

Other Non-Cash (Income)/Expense 1,073 3,551 2,593 1,404 1,745

Other Operating Cashflow (982) (3,062) (1,263) (1,673) (1,745)

Net Interest (Paid)/Received (543) (555) (719) (709) (716)

Tax Paid (455) (233) (161) (97) (132)

Cashflow From Operations 1,302 2,056 2,894 95 1,141

Capex (2,330) (692) (436) (732) (706)

Disposals Of FAs/subsidiaries 45 21 0 0 0

Acq. Of Subsidiaries/investments (2,559) (21) 0 0 0

Other Investing Cashflow 15 69 449 0 0

Cash Flow From Investing (4,828) (623) 13 (732) (706)

Debt Raised/(repaid) 3,520 (649) (1,264) (180) 1,279

Proceeds From Issue Of Shares (80) 0 0 0 0

Shares Repurchased

Dividends Paid (141) (200) 0 0 0

Preferred Dividends

Other Financing Cashflow 0 0 0 0 0

Cash Flow From Financing 3,299 (849) (1,264) (180) 1,279

Total Cash Generated (227) 585 1,643 (817) 1,715

Free Cashflow To Equity (6) 785 1,643 (817) 1,715

Free Cashflow To Firm (2,972) 1,999 3,667 117 1,201

We forecast core net profits to trend lower in FY17F and FY18F, as more lucrative legacy contracts come to an

end.

SAKP should continue to deliver positive cashflow from operations, but

FY18F operating cashflows should be very minimal, in our forecast.


111

BY THE NUMBERS… cont‟d

SOURCE: CIMB RESEARCH, COMPANY DATA

Balance Sheet


Total Cash And Equivalents 1,257 1,948 3,591 2,774 4,489

Total Debtors 3,621 4,114 3,768 2,732 2,871

Inventories 637 572 438 386 408

Total Other Current Assets 203 195 180 180 180

Total Current Assets 5,717 6,828 7,978 6,071 7,948

Fixed Assets 13,771 14,906 14,235 13,423 12,751

Total Investments 1,377 1,569 1,459 1,681 1,931

Intangible Assets 7,740 8,241 8,209 8,177 8,177

Total Other Non-Current Assets 5,958 4,948 4,239 4,501 4,600

Total Non-current Assets 28,846 29,664 28,142 27,783 27,459

Short-term Debt 1,099 2,091 3,953 4,465 5,516

Current Portion of Long-Term Debt

Total Creditors 3,192 4,339 4,051 2,174 2,299

Other Current Liabilities 164 115 115 115 115

Total Current Liabilities 4,455 6,545 8,119 6,753 7,930

Total Long-term Debt 15,855 16,238 13,477 12,390 12,618

Hybrid Debt - Debt Component

Total Other Non-Current Liabilities 2,260 1,496 1,496 1,496 1,496

Total Non-current Liabilities 18,115 17,734 14,974 13,886 14,114

Total Provisions 0 0 0 0 0

Total Liabilities 22,570 24,279 23,093 20,639 22,044

Shareholders' Equity 11,986 12,207 13,021 13,209 13,357

Minority Interests 7 6 6 6 6

Total Equity 11,993 12,213 13,027 13,215 13,363

Key Ratios

Jan-15A Jan-16A Jan-17F Jan-18F Jan-19F

Revenue Growth 18.7% 2.4% (24.4%) (12.2%) 5.1%

Operating EBITDA Growth 67.8% (0.1%) (26.7%) (12.5%) 3.5%

Operating EBITDA Margin 30.7% 30.0% 29.1% 28.9% 28.5%

Net Cash Per Share (RM) (2.62) (2.73) (2.31) (2.35) (2.28)

BVPS (RM) 2.00 2.04 2.17 2.20 2.23

Gross Interest Cover 2.65 2.16 1.31 0.85 0.97

Effective Tax Rate 11.3% 0.0% 16.5% 34.0% 47.1%

Net Dividend Payout Ratio 21.4% 6.0% 16.0% 99.1% 40.4%

Accounts Receivables Days 116.6 138.6 187.3 175.4 143.9

Inventory Days 29.38 30.93 33.85 31.29 28.49

Accounts Payables Days 170.7 192.7 281.0 236.4 160.6

ROIC (%) 6.35% 4.31% 3.49% 2.39% 2.75%

ROCE (%) 6.92% 5.59% 3.37% 2.24% 2.55%

Return On Average Assets 5.57% 5.37% 3.04% 2.23% 2.52%

Key Drivers

Jan-15A Jan-16A Jan-17F Jan-18F Jan-19F

Outstanding Orderbook (RMm) - - - - -

Order Book Wins (RMm) - - - - -

Order Book Depletion (RMm) - - - - -

Average Day Rate Per Ship (US$) - - - - -

No. Of Ships (unit) - - - - -

Average Utilisation Rate (%) 0.0% 0.0% 0.0% 0.0% 0.0%

We do not expect SAKP‟s net gearing

to breach 1.1x in our forecast period.


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Score Range: 90 - 100 80 - 89 70 - 79 Below 70 or No Survey Result

Description: Excellent Very Good Good N/A

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Spitzer Chart for stock being researched ( 2 year data )

SapuraKencana Petroleum (SAKP MK)

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2016, Anti-Corruption 2016.

AAV – Very Good, n/a, ADVANC – Very Good, Certified, AEONTS – Good, n/a, AMATA – Excellent, Declared, ANAN – Very Good, Declared, AOT – Excellent, Declared, AP – Very Good, Declared, ASK – Very Good, Declared, ASP – Very Good, Certified, BANPU – Very Good, Certified, BAY – Excellent, Certified, BBL – Very Good, Certified, BCH – not available, Declared, BCP - Excellent, Certified, BEM – Very Good, n/a, BDMS – Very Good, n/a, BEAUTY – Good, Declared, BEC - Good, n/a, BH - Good, Declared, BIGC - Excellent, Declared, BJC – Good, n/a, BLA – Very Good, Certified, BPP – not available, n/a, BTS - Excellent, Certified, CBG – Good, n/a, CCET – not available, n/a, CENTEL – Very Good, Certified, CHG – Very Good, n/a, CK – Excellent, n/a, COL – Very Good, Declared, CPALL – not available, Declared, CPF – Excellent, Declared, CPN - Excellent, Certified, DELTA - Excellent, Declared, DEMCO – Excellent, Certified, DTAC – Excellent, Certified, EA – Very Good, Declared, ECL – Good, Certified, EGCO - Excellent, Certified, EPG – Good, n/a, GFPT - Excellent, Declared, GLOBAL – Very Good, Declared, GLOW – Very Good, Certified, GPSC – Excellent, Declared, GRAMMY - Excellent, n/a, GUNKUL – Very Good, Declared, HANA - Excellent, Certified, HMPRO - Excellent, Declared, ICHI – Very Good, Declared, INTUCH - Excellent, Certified, ITD – Good, n/a, IVL - Excellent, Certified, JAS – not available, Declared, JASIF – not available, n/a, JUBILE – Good, Declared, KAMART – not available, n/a, KBANK - Excellent, Certified, KCE - Excellent, Certified, KGI – Good, Certified, KKP – Excellent, Certified, KSL – Very Good, Declared, KTB - Excellent, Certified, KTC – Excellent, Certified, LH - Very Good, n/a, LPN – Excellent, Declared, M – Very Good, Declared, MAJOR - Good, n/a, MAKRO – Good, Declared, MALEE – Very Good, Declared, MBKET – Very Good, Certified, MC – Very Good, Declared, MCOT – Excellent, Declared, MEGA – Very Good, Declared, MINT - Excellent, Certified, MTLS – Very Good, Declared, NYT – Excellent, n/a, OISHI – Very Good, n/a, PLANB – Very Good, Declared, PSH – not available, n/a, PSL - Excellent, Certified, PTT - Excellent, Certified, PTTEP - Excellent, Certified, PTTGC - Excellent, Certified, QH – Excellent, Declared, RATCH – Excellent, Certified, ROBINS – Very Good, Declared, RS – Very Good, n/a, SAMART - Excellent, n/a, SAPPE - Good, n/a, SAT – Excellent, Certified, SAWAD – Good, n/a, SC – Excellent, Declared, SCB - Excellent, Certified, SCBLIF – not available, n/a, SCC – Excellent, Certified, SCN – Good, Declared, SCCC - Excellent, Declared, SIM - Excellent, n/a, SIRI - Good, n/a, SPALI - Excellent, Declared, SPRC – Very Good, Declared, STA – Very Good, Declared, STEC – Excellent, n/a, SVI – Excellent, Certified, TASCO – Very Good, Declared, TCAP – Excellent, Certified, THAI – Very Good, Declared, THANI – Very Good, Certified, THCOM – Excellent, Certified, THRE – Very Good, Certified, THREL – Very Good, Certified, TICON – Very Good, Declared, TISCO - Excellent, Certified, TK – Very Good, n/a, TKN – Good, n/a, TMB - Excellent, Certified, TOP - Excellent, Certified, TPCH – Good, n/a, TPIPP – not available, n/a, TRUE – Very Good, Declared, TTW – Very Good, Declared, TU – Excellent, Declared, UNIQ – not available, Declared, VGI – Excellent, Declared, WHA – not available, Declared, WHART – not available, n/a, WORK – not available, n/a.

Rating Distribution (%) Investment Banking clients (%)

Add 57.7% 7.5%

Hold 31.7% 2.8%

Reduce 9.8% 0.6%

Distribution of stock ratings and investment banking clients for quarter ended on 30 September 2016

1598 companies under coverage for quarter ended on 30 September 2016

1.10

1.30

1.50

1.70

1.90

2.10

2.30

2.50

2.70

2.90

3.10

Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16

Price Close

6.8

4

4.4

8 3.1

4

3.2

4

1.8

4

2.0

3

2.0

3

Recommendations & Target Price

Add Hold Reduce Not Rated


117

Companies participating in Thailand’s Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of October 28, 2016) are categorized into: - Companies that have declared their intention to join CAC, and - Companies certified by CAC

CIMB Recommendation Framework

Stock Ratings Definition:

Add The stock’s total return is expected to exceed 10% over the next 12 months.

Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months.

Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months.

The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.

Sector Ratings Definition:

Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation.

Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation.

Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.

Country Ratings Definition:

Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark.

Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark.

Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.

Company Note - CIMB Note IMPORTANT DISCLOSURES, ... SAKP is the product of the merger of SapuraCrest...

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Transcript of Company Note - CIMB Note IMPORTANT DISCLOSURES, ... SAKP is the product of the merger of SapuraCrest...