News

• SKPETRO has made another significant gas discovery from its three-well 2015 drilling campaign within the Block SK408 Production Sharing Contract (PSC) area, offshore Malaysia. All three wells were targeted non-associated gas within the primary target Late Miocene Carbonate reservoirs.

• SKPETRO is the exploration operator with a 40% working interest with partners PETRONAS Carigali Sdn. Bhd. (30%) and Sarawak Shell Bhd. (30%) holding the remaining interest.

Financial Impact

• The discovery of the gas field in SK408 has brought SKPETRO’s gas reserves to 9 tcf from 6 tcf previously, showing massive long run potential for the group to monetise its gas assets.

• Positive news but no earnings contribution expected in the near term due to 2-3 years minimum lead time typically for the group to monetise its gas assets.

Pros/Cons

• Field Development Plan (FDP) for the SK310 block B15 field by the group has been approved by Petronas with 1st gas targeted to be at 4Q17. However, we are not imputing the numbers for the gas field as the GSA agreement is yet to be finalized and announced officially.

• For its T&I segment, likelihood of premature contract termination remains low for the company for the time being but delay in asset deliveries is a possibility given Petrobras’ deferment of some of its pre-salt development projects in the year of low oil prices.

• 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.

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 TP of RM1.67 based on unchanged PER of 12x. While we like that fact that the group possesses vast amount of gas reserves, monetisation is still way ahead and its near term earnings outlook remains weak in line with overall industry slowdown.

Source: Hong Leong Investment Bank Research - 1 Jun 2016