News

• SKPETRO wishes to announce that its wholly-owned subsidiaries, Sapura Energy Ventures Sdn Bhd and Kencana Energy Sdn Bhd and their partner, Petrofac Energy Developments Sdn Bhd, have reached a mutual agreement with Petroliam Nasional Berhad ("PETRONAS") for the cessation of the Berantai Risk Service Contract ("RSC").

Financial Impact

• It is expected to bring about net profit impact of circa RM100m.

• However, the group would also be reimbursed fully on its CAPEX spent on its Berantai RSC, including the cost of the FPSO servicing the marginal field.

• This also implies that there would not be significant loss in value for the group as it would recoup most of its initial investments.

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.

• For its T&I segment, likehood of premature contract termination remains low 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 deliver its final vessel (Sapura Rubi) in 3QCY16.

• Overall, near term outlook remains uncertain for the group amidst volatile crude oil price environment, in line with the current global O&G industry slowdown. 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

• Maintain forecast to take into account the possibilities of upside potential from other business segments due to recovery in oil prices. Our net profit forecast for both FY17 and FY18 is considered conservative in comparison to the consensus.

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 based on lower 0.6x PBV FY18 PBV with TP reduced to RM1.35 from RM1.58 previously. Reduction in target multiple is mainly due to the higher unpredictability of its medium term earnings outlook and risks of further asset writedowns.

Source: Hong Leong Investment Bank Research - 12 Jul 2016