Sold Down Opportunity

Petra Energy (PENB) has not been spared by the recent market selloff, which has seen its share price falling by >50% at one point in time after the surprise general election result, attributed to our belief on concerns at the shareholders level. Given that the current global oil price is holding steady, and being a direct beneficiary through the Kapal, Banam, Meranti (KBM) risk-sharing contract, the risk-reward is looking favourable. Hence, we upgrade our rating to BUY with a higher 12-month TP of RM0.59.

Finally, More Work Orders Materialising

Petronas has been issuing more contract awards and work orders post the recent general election, and PENB has also seen higher work orders for hook-up, construction and commissioning (HuCC) contract to the value of RM150m. The maintenance, construction and modification (MCM) contract with Petronas is also picking up momentum in terms of more work programmes amounting to RM50m by our estimates. PENB has recently completed the production enhancement programme and is in the midst of doing some commissioning work. Based on a back-of-envelope calculation, this will increase targeted production to approximately 5,500–5,800 barrels per day (from 4,500 barrels). We are also positive that the KBM risk service contract (RSC), which is due to expire by mid-2020, stands a good chance of being extended, on the current high oil price and good production track record.

Strong Contender Likely to Secure the Next 5-year HUCC Contract

PENB had secured a one-year extension from Petronas Carigali on the HuCC contract, which will expire in May 2019. Petronas has now asked for a rebid for another 5 years, which will be split into 4 packages, amounting to RM4bn. We believe that PENB stands a good chance of winning, being the incumbent. The total outstanding orderbook currently stands at RM1.6bn, comprising the RM1bn Petronas MCM contract and the remainder of the HUCC extension.

Still Bidding for PETROS License

While Petronas and Petros (Sarawak state-owned O&G company) are still trying to sort out their ongoing dispute, we understand that Malaysian service providers like PENB are still waiting for Petros to award licences to operate in Sarawak. We believe that PENB should not have a problem in getting the licence, which would lead to more contracts in the future.

Concern Over Board Directors/shareholders

We believe that the current share price has already priced in the risk of major shareholders having links with the previous government. In addition, all of the contracts in hand are secured through open bidding, and we believe that the current valuation of a 4x FY19E PER does not truly reflect the company’s fundamentals.

Stronger Expected 2H18 Earnings Momentum

We expect the earnings momentum to pick up after 2Q18 on the back of higher work orders. The remuneration fee from the KBM RSC is also expected to increase over the higher oil price and lifting volume post the production enhancement exercise.

Upgrade to BUY; Value Has Emerged

We upgrade the stock to BUY and raise our SOTP-based target price to RM0.59 (from RM0.40). Even after pegging a 50% discount to the services and marine business at a 4x EV/EBITDA multiple, this stock still offers 18% upside potential, which is appealing, in our view.

Key Risks

Key downside risks include: 1) RM strengthening; 2) a drastic drop in the oil price or KBM RSC production volume; and 3) a slowdown in work orders.

Source: Affin Hwang Research - 5 Jul 2018