News

• Upstream has reported that Petrobras is carrying a fresh round of renegotiations with its main suppliers of flexible pipelaying support vessels to cut costs.

• It currently has 16 PLSV operating in Brazilian waters and has an order take delivery of another 7 newbuild vessels with delivery scheduled until late 2017.

• Multiple sources have also said that the group has no intention of term inating for any of SKPETRO’s JV ves sels early but contract terms are under ongoing negotiations. Financial Impact

• Assuming 15% rate cut across its pipe laying assets with other variables remaining constant, it would lead to negative earnings impact of 8% and 12% on FY17 and FY18 earnings forecast respectively.

Pros/Cons

• Definitely a negative news to the company as it brings higher uncertainty to its Pipelaying JV earlier expected to be one of its earning anchor in the current tough times of the industry. However, this action is understandable with Petrobras currently grappling with on-going ‘Car Was h’ s candal’ and high gearing.

• Likehood of premature contract termination remains low for the company for the time being but delay in asset deliveries is a poss ibility given Petrobras ’ deferment of s ome of its pre-salt development projects in the year of low oil prices.

• At the moment, there is no official statement from SKPETRO validating the contract renegotiation with Petrobras and more details are needed to as certain the net impact of the initiative on the group’s bottom line.

• The company currently has 5 vessels working for Petrobras and is due to delivery its final vessel (Sapura Rubi) in 3QCY16.

• Overall, outlook remains uncertain for the group amidst volatile crude oil price environment. We still believe 2016 would be a challenging year for the group given weak contract replenishment outlook and crude prices.

• The only potential catalyst to its share price would be the confirmation of GSA for its gas assets with Petronas. Otherwise, it would be an unexciting year for the group, consistent with the overall weak O&G industry development.

Risks

• Execution risk;
• Prolonged low oil price; and

Forecasts

• Unchanged

Rating

HOLD

Positives

• Integrated business model, global trend towards offshore production.

Negatives

• Increased competition for growth markets, complexities of running a larger organization, plunged in oil price.

Valuation

• We maintain our HOLD call on the stock with reduced TP of RM1.67 based on lower PER of 12x from 13x previously to price in high uncertainty of the Petrobras contract.

Source: Hong Leong Investment Bank Research - 16 May 2016