Highlights

• Following are the salient points from analyst briefing on last Friday.

• Following the recent gas discovery in its SK408 gas field which gives circa another 3 tcf gas reserve to the group, the company has updated that commerciality of the field is better than its existing B14 field which is not viable to be developed under the current oil environment. We gather than 1st gas on the newlydiscovered reserve can be achieved earliest in 2019 as the group goes through several stages to monetise the gas field.

• The current B15 gas field is close to finalizing its field development with funding already secured before this. The group is going to operate the field by end 2017 and it is still economically viable even under the current oil environment . CAPEX spent was lower than expected at US$90m for SKPETRO’s share from US$102m budgeted previously due to savings gained from contractors.

• For its Petrobras contract, the group confirmed that its client has approached for a rate cut on its extension of the pipelaying contracts and a discount of circa 6% was given by SKPETRO to maintain its relationship with client. However, termination of vessel as rumoured in Upstream previously is denied by the management and risks of near term termination is low as oil prices are recovering.

• For its tender rig business, outlook has turned weaker with tender barges fetching USD70-90k/day while semi-subs fetched USD110-120k/day. 5 rigs were stacked in 2015 with 2 expected to go back into contract this year. However, another 5 rigs would be out of contract this year, therefore reinforcing our view that the rig segment would be even weaker this year. We believe the worst scenario would be 8 rigs being idle at a point of time this year and this would impact its profitability adversely.

• Management guided that its current orderbook would only result in revenue of RM6.5bn and RM3.9bn for FY17 and FY18, indicating weak profitability reinforced by margin pressures on existing backlog. Current bid book of the group stood at US$7bn with half of it targeting the Asia Pacific region. While prospects of further securing jobs are intact, profitability of new contracts remains under pressure due to intense competition among contractors.

Forecasts

• FY17/18 forecast is cut by 80%/67% to account for higher idling and lower DCR for tender rigs and lower replenishment for its fabrication and T&I business segments.

Catalysts

• Contract win in DWM business

• Product penetration into new countries.

• Turnaround in Marine business.

Risks

• Global recession hitting O&G price;

• Technology advancement;

• Relaxing of drilling waste management regulations.

Valuation

We maintain our HOLD call with a lower TP of RM1.58. Our valuation methodology is now switched to PBV from PER due to unpredictability of its earnings in the medium term. Our assumption of 0.7xp PBV multiple is pegged to FY18 BVPS, which is higher than our target of 0.5x for rig and OSV players as we factor in its potential upside for its upstream assets and edge as an integrated services player.

Source: Hong Leong Investment Bank Research - 13 Jun 2016