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Wednesday, June 29, 2016

Bright future for SapuraKencana in medium term, says CIMB Research

Wednesday, 29 June 2016 | MYT 8:16 AM
Bright future for SapuraKencana in medium term, says CIMB Research

KUALA LUMPUR: CIMB Equities Research sees a bright future for SapuraKencana Petroleum (SK Petro) in the medium term as it has good assets, like its fleet of 12 tender rigs, and fleet of six pipe-lay support vessels (PLSV) chartered to Petrobras and whose contracts are likely secure.

“While the near-term earnings outlook is muted, SK Petro has all the elements in place to benefit from the recovery when, not if, it comes,” said the research house on Wednesday.

SK Petro’s 1QFY17 core net profit of RM147m, excluding forex losses, was down 40% on-year, but CIMB Research considers this to be an excellent result given the circumstances.

Having said that, the remaining quarters of the year will likely be weaker, as the engineering & construction business runs down its orderbook, and as its drilling rigs’ utilisation falls.

In the first quarter February to April 30, 2016, SK Petro delivered group revenue that was down 14% on-year, with energy revenue down 28.5% as a result of the lower selling price of oil, drilling revenue down 19.1% due to lower utilisation of its tender and semi-tender rigs, and engineering & construction revenue down 7% on-year as the orderbook is gradually recognised.

Pretax profits declined a more significant 63% on-year, but SK Petro was assisted by tax writebacks, such that core net profits declined just 40% on-year.

Energy profits fell 98%, engineering & construction profits fell 58%, and drilling profits fell 24% in 1QFY17. In all segments, profits fell faster than revenue, on the back of the lower oil price, lower rates for drilling rigs, and a lower level of high-value added engineering & construction work during the quarter just over.

Drilling made up two-thirds of group earnings, as the Energy segment just broke even, while engineering & construction margins fell 9% pts on-year to just 7.7%.

“The company sounded a cautious note for the next few quarters, reminding analysts in a briefing that the utilisation of its drilling rigs – currently at 60-70% – is expected to decline to 50% by year-end after some of the current contracts complete their course.

“While crew on the rigs will also see their service contracts terminate in tandem, there is a certain level of cash operating costs and depreciation expense that will remain,” it said.

CIMB Research said SK Petro had a US$5.3bil (RM21.3bil) orderbook at the start of FY17, with US$1.7mil to be recognised in FY17. The company has a US$7bil bid book and needs to win at least US$1.5bil to keep the subsequent quarters relatively busy, and win US$4-5bil to reach full capacity.However, global competition is fierce.

Despite the challenges, SK Petro is fighting fit and continues to pursue jobs aggressively all over the world. As an indication of its competitiveness, it won US$126mil worth of contracts recently. It also achieved RM500mil worth of cost savings so far, for example by reducing contract headcount, and more cost reduction steps are being executed.

Clearly, SK Petro is led by dynamic management that have not led down their guard.

“Our existing earnings forecasts are no longer in sync with the reality of the tough oil markets and need to be reduced considerably. We are in the midst of this process and leave our recommendation, EPS forecasts, and target price unchanged for now.

“Nevertheless, we agree with the company’s assessment that its earnings will probably trough in 2016-17, and that the market for oil and gas service contractors will likely improve from 2018 and beyond.

“SK Petro’s gas fields, mainly offshore Sarawak, contains 238 mmboe of gas reserves (and 13.2 mmboe of oil reserves), valued at US$1bn. The company will invest in the next two years to bring them to production, with the SK310 B15 field starting production from 4QFY17, followed by the much-larger SK408 field during FY18. In this way, SAKP will enhance its direct exposure to the recovery in oil and gas prices,” said the research house.

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